Thursday, April 14, 2011

Americans Are Voting With Their Feet For Low Taxes and other Pro-Growth Policies

CNN and Money Magazine recently announced a list of the 10 fastest growing cities in the United States, based upon figures from the most recent census. That is, the following ten cities had the fastest growth rates in the past decade:

1. Palm Coast, Florida, 92 percent.

2. St. George, Utah, 52.9 percent.

3. Las Vegas, Nevada, 41.8 percent.

4. Raleigh, North Carolina, 41.8 percent.

5. Cape Coral, Florida, 40.3 percent.

6. Provo, Utah, 39.8 percent.

7. Greely, Colorado, 39.7 percent.

8. Austin, Texas, 37.3 percent.

9. Myrtle Beach, South Carolina, 37 percent.

10. Bend, Oregon, 36.7 percent.

Obviously this list reflects the general movement in the American population toward the South and West. The list also seems to reflect a correlation between high population growth, on the one hand, and the low tax and pro-growth economic policies followed by the individual states where the cities are located, on the other. For instance the nine fastest-growing cities are in so-called "red" states, measured by whether a state voted for George W. Bush for President in 2004. Moreover, the six fastest-growing cities, and eight out of the top ten, are in so-called "right to work" states, that is, states that have opted under the Taft-Hartley Act to prevent unions and employers from negotiating "closed shop agreements," that is, collective bargaining agreements requiring employees to join a union as a condition of employment. (See here for a list of such states.) Also, three of the five fastest growing cities are in states (Florida and Nevada) with no income taxes. Finally, according to the Tax Foundation, eight of the ten cities listed, including seven of the top eight, are ranked among the states with the fifteen best tax climates for business.

The data thus show the American system of competitive federalism at work, with citizens moving to states that adopt pro-growth economic policies, e.g., low taxes and right to work laws. This blog has previously discussed other evidence of such competitive federalism at work. It should be noted that such competitive federalism is not a permanent or given phenomenon, but is instead the result of institutional choices contained in the Constitution itself and federal legislation. For instance, the Constitution divides power between the national and local governments, thereby depriving the national government of a monopoly over the content of tax and regulatory policy. Perhaps James Madison had this sort of competition in mind in Federalist 51, when he wrote:

"In the compound republic of America, the power surrendered by the people is first divided between two distinct governments, and then the portion allotted to each subdivided among distinct and separate departments. Hence a double security arises to the rights of the people. The different governments will control each other, at the same time that each will be controlled by itself."

Moreover, states cannot prevent their citizens from traveling to or moving to another state. See Crandall v. Nevada, 73 U.S. 35 (1868). This "fundamental right to travel" ensures that citizens may "exit" states whose economic policies thwart economic growth and wealth creation, and such exit no doubt explains much migration from one state to another. Finally, there is the Taft-Hartley Act, which allows individual states to opt out of that portion of federal labor law that otherwise allows companies and unions to negotiate closed shop agreements. None of this is to say that ALL federal legislation, for instance, facilitates competitive federalism. Some such legislation imposes a uniform federal approach to a regulatory question. In some cases such a unified approach is justified, as when an alternative approach would leave each state free to impose its own regulatory choices on interstate commerce. However, given the vast (and unjustified) scope of the national commerce power under current Supreme Court precedent, some such purportedly federal legislation applies to purely local matters, thereby eliminating the possibility of rivalry between states on matters of local concern. (At the same time, Congress does not always exercise all of the power the Supreme Court has given it. For instance, Congress still allows states to determine much of the content of corporate law, even though Congress possesses the authority under current law to impose a national corporate code.) Finally, some federal legislation affirmatively distorts rivalry between the states, subsidizing those that unduly tax their own citizenry. Thus, under the current tax code, citizens may deduct state taxes from their actual income when calculating that share of their income that will be subject to federal tax. As a result, a state that increases its taxes thereby deprives the national government of revenue the latter would otherwise receive, effectively shifting a portion of the state tax increase to citizens of other states, who must make up the lost federal revenue or, eventually, pay the interest on additional debt the national government must take on to meet its obligations. In short, competitive federalism can enhance overall economic welfare by preventing states from adopting legislation that infringes on economic liberty, and the census results reported by Money/CNN show the results of such federalism at work. At the same time, background rules that allocate too much power to the national government and impact the incentives that states face can dampen such competition and thus undermine (in part) its welfare-increasing properties.