Wednesday, November 17, 2010

Federalism at Work Protecting Economic Liberty

A recent study by Americans for Tax Reform finds that states with high taxes and pro-union labor laws are losing citizens and thus losing influence in Congress (and, it should be noted, the Electoral College.)

In particular the study finds that eight states are projected to gain at least one Congressional seat as a result of the 2010 Census, with the gains distributed as follows. Note that the states highlighted in red cast their electoral votes for George W. Bush in 2004, while those highlighted in blue cast their for John Kerry.

1) Texas (4 seats);

2) Florida (2 seats);

3) Georgia (1 seat);

4) Nevada (1 seat);

5) South Carolina (1 seat);

6) Utah (1 seat);

7) Washington (1 seat);

The same study finds the losses distributed thusly:

1) New York (2 seats);

2) Ohio (2 seats);

3) Illinois (1 seat);

4) Louisiana (1 seat);

5) Massachusetts (1 seat);

6) Michigan (1 seat);

7) Missouri (1 seat);

8) New Jersey (1 seat);

9) Pennsylvania (1 seat);

The results have obvious ramifications for the 2012 Presidential Election. In particular, the results show a net gain of six electoral votes for states that cast their votes for George W. Bush in 2004 over John Kerry. Recall that, in 2004, President Bush received 286 electoral votes --- 16 more than the 270 needed to prevail. If the same states vote for the Republican candidate in 2012, that candidate will receive 292 electoral votes. As a result, such a candidate could lose, say, Ohio (18 electoral votes in 2012), and still prevail. That is to say, the electoral map is shifting in favor of the Republicans.

The study also finds that, among the states gaining seats, the average top tax rate on personal income is 2.8 percent, while the average top rate in states losing seats is just over 6 percent. Moreover, 7/8s of the states that gained seats have passed so-called "right to work laws." Such laws, authorized by the Taft-Hartley Act of 1947 (passed over President Truman's veto) prevent Unions and employers from negotiating collective bargaining agreements that require employees to join or financially support a union as a condition of employment with the employer in question. States that decline to adopt so-called "right to work laws" are known as "closed shop states."

For proponents of economic liberty, the message of the study is clear, namely, states with low taxes on high income earners and a favorable climate for business create economic opportunities and thus attract in-migration, while states with high taxes on the well-to-do and unfavorable business climates stultify economic growth and induce out-migration. These proponents would also view such migrations as part and parcel of a well-functioning system of federalism whereby states compete with one another for productive citizens and capital. Such competition, they would argue, deters states from adopting unduly onerous regulations and taxes at the behest of special interests, thereby providing a bulwark against economic oppression.

Proponents of high taxes and closed shops might interpret this data in a different way, however. These analysts might see these data as reflecting a "race to the bottom," that is, destructive competition between the states for high income individuals and businesses hostile to unions. Under this view, states compete with each other by lowering taxes and relaxing protection for workers, thereby undermining the ability of each state to generate sufficient tax revenue to support essential functions as well as the ability to ensure fair wages and working conditions for labor. Adherents to this view would presumably decry the system of federalism that allows this competition to take place and, for instance, advocate repeal of that portion of the Taft-Hartley Act that authorizes states to pass right to work laws.

My own sense is that any "race to the bottom" characterization of these data is strained. I have no doubt that such races can occur. For instance, absent federal regulation, individual states may adopt lax anti-pollution regulation if pollution produced by industrial activity crosses state lines. (Imagine, for instance, a factory in one state that emits pollutants into a river that then flows through several other states.) In such cases, no individual state captures the full costs and benefits of the legislation it passes because of negative externalities flowing from the activity in question. In these settings, it is appropriate for the national government to step in and impose a uniform solution. When it comes to income tax rates and right to work laws, however, any supposed externalities are far less apparent. With respect to these policies, then, states seem to operate more or less as "single owners" of the costs and benefits of legislation they impose. For instance, if a state raises taxes and spends the proceeds on police protection or sanitation, the state's own citizens will benefit and property values will rise. (While other expenditures, e.g., on education, may produce some spillovers, as educated citizens might move elsewhere, the appropriate response to such spillovers would seem to be some national expenditures on education, funded via national taxation, instead of giving individual states the ability to tax and spend without consequence.) Moreover, if "closed shop" laws make industries and workers more productive, then states will adopt such laws as a means of attracting labor and capital. Finally, the size of population flows seems large enough to suggest that working class individuals, that is, individuals supposedly helped by laws allowing closed shops and high taxes on the wealthy, and not just those in the upper income brackets, are moving to low-tax, right to work states.

It should be noted that the "federalism" mentioned here is not of a constitutional dimension, at least according to the jurisprudence of the Supreme Court. Under current Supreme Court case law, Congress could, if it wished, eliminate right to work laws altogether, allowing unions and employers to negotiate "closed shop" arrangements in any state. Indeed, that was the state of the law between passage of the National Labor Relations Act in 1935 and its amendment via the Taft-Hartley Act. (Though it should be noted that, in 1935, the Supreme Court still enforced limitations on Congress's Commerce power, thereby limiting the scope of the NLRA to business of the sort that, if crippled by a strike, would place a direct burden on interstate commerce.) Moreover, Congress could, if it wished, provide citizens in high tax states with tax federal credits that compensate citizens in high tax states for the tax premium they pay compared to their fellow citizens who live in other states. (Indeed, under the current tax code, taxpayers can generally deduct any state taxes they pay from their gross income, and this rule functions as a federal subsidy of sorts for high tax states.) Still, Congress has chosen NOT to take these steps, thereby facilitating competition among the states for labor and capital, competition that deters oppresive taxation and fosters labor and other laws friendly to wealth and job creation. In so doing, Congress seems sensitive to the admonition of James Wilson, perhaps the most under-appreciated of the Founding Fathers, pictured at the top of this post. According to Wilson, describing the appropriate boundaries between state and federal power at the Pennsylvania Ratifying Convention:
"Whatever object of government is confined in its operations and effects, within the bounds of a particular state, should be considered as belonging to the government of that state; whatever object of government extends, in its operation or effects, beyond the bounds of a particular state, should be considered as belonging to the government of the United States."
Fortunately Senator Robert Taft, pictured after Wilson above, and other supporters of the Taft-Hartley Act, agreed with Wilson.