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Saturday, December 11, 2010

Lied study may be wrong again

The recent Lied study recommending an increase in spending on education may be wrong on another count. The favored narrative among the political left is that Nevada's low tax status was once used to attract people to the state, but it may no longer be working. Instead, they argue, we should increase taxes and spend the revenue on new infrastructure and social services.

This narrative fails on two accounts. 1) Nevada is a middle tax state. Sure, residents pay less, but we tax, tax, and tax again, tourists and gaming (but even this impacts residents and the economy because dollars are taken out of job creation, wages, dividends and profits and put into the less productive, if not destructive, government sector). 2) Nevada isn't projected by Forbes or Moody's to be among the top ten states people are fleeing. It is one of many economic indicators, but for now it will suffice for this blog post and discussion.

Those states are:
  1. New York
  2. Illinois
  3. Ohio
  4. Nebraska
  5. Kansas
  6. Iowa
  7. Louisiana
  8. North Dakota
  9. South Dakota
  10. Mississippi

Some of the states above suffer from high cost of living, high taxes and low job growth (New York and Ohio). Other states are suffering, in part, because of the BP oil spill (Louisiana and Mississippi).

So why are people fleeing these states? Moody's Analytics and Forbes Magazine noticed some patterns; among those patterns was, you guessed it, high taxes.

Warm climate, low cost-of-living, pretty scenery... now only if we had the
low tax status like other growth model states...

My suspicion is that the expert panel for the Lied study fell into confirmation bias. That is, they saw the evidence they wanted to see to confirm their own narrative of how things work or how things should be. Personal bias toward greater government spending allowed them to see what they wanted to see and ignore evidence contrary to their own thesis.

They saw other states like Utah and North Carolina and how they invested in higher education and assumed that must be one reason why the high-tech and high paying jobs were flocking to those states. They looked at Arizona and saw two major research universities and concluded, that their success must be do to greater investment from tax dollars.

There is just one problem - they didn't bother looking up actual tax data. So lets look at the tax collection per-capita rankings from the Brookings Institution.Tax collection per capita tells us how much state and local governments are collecting in taxes per resident.

Toss in other low performers like California and Nevada with New York, Illinois, Ohio, Nebraska, Kansas, Iowa, Louisiana, North Dakota, South Dakota, and Mississippi and the average rank in tax-collection per capita is  23 (the rank rises to 25 if you exclude California and Nevada). In other words, the worst performing states in retaining residents are more likely to also be high tax states.

Compared to top performers like Arizona (a state Nevada says we want to be like) Utah (another state we claim to want to emulate), Texas, North Carolina (again another state the Leid Study says we should emulate) and Florida, their tax collection per-capita averages out to 35. In other words, the top performing states are more likely to be low tax states.

In fact, every state Nevada's political and expert class claims they want to emulate, taxes LESS than we do. In overall tax collection per-capita, Arizona ranks 38th; Florida 27; North Carolina 34, Texas 38 and Utah 40 - all top performing states are in the bottom half. Meanwhile, Nevada ranks 24th - we are in the top half of all states for tax collection per-capita.

You get the picture.

In the end, there just isn't enough evidence to say "low taxes" are to blame or that "higher taxes" will solve our problems. People who are saying that are just trying to confirm their own biases at this point. In fact, it seems there is more evidence to suggest that low taxes per-capita are better. A more in-depth analysis may show low-taxes play a role, or none at all, but the fact remains that the states Nevada's elite class wants to emulate all tax less than Nevada.

So how do these lower tax states get the job done while Nevada falls flat on its face with more revenue per capita? The answer is simple and I've said it a hundred times. It is not about how much we should spend but rather, how effectively we should spend what we already have.

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