Life on Earth
Human beings are only able to survive and thrive on Planet Earth through the use of their minds. Wild animals living in nature forage or hunt for their food, they require no clothing or other material goods and are at the mercy of nature, weather, predators and humans.
The way humans live on Earth is by producing value with their minds and exchanging that value for other values. People who are able to produce more value than they consume acquire stored value, or “wealth.”
A person can lose their wealth through poor judgment, theft, and the operation of law via government force. A person can have their ability to acquire wealth impaired by government force in the same way through taxation.
“Taxation” is the involuntary taking of a person’s property or earnings by governmental bodies through the use of government force to fund government programs. You cannot opt-out. You cannot evade or avoid paying these taxes without some kind of penalty being imposed on you, up to the loss of your freedom and possibly, if you resist force with force, your life. Sometimes, like in Colorado, politicians may call a tax a “premium” or a “fee” to evade the spirit and intent of the Taxpayer’s Bill of Rights amendment, however, this makes no difference. Any forced taking by the government to fund government programs is a TAX.
The moral way to live is to use one’s mind to create value and acquire wealth. It is immoral to use the power of government force to take money from people to give to other people for any reason. Your “need” does not give you a moral claim on the earnings or property of others. The only legitimate use of the power of taxation is to fund legitimate government functions, which are: the protection of life, liberty, and property. Life and liberty are protected through law enforcement and the military. Property rights are protected via law enforcement and the judicial system.
Roads, bridges, public infrastructure, and other public goods are seen by many as legitimate functions of government as well, though solid libertarian arguments exist for the opposite case. For the purpose of the discussion that follows, I will stipulate that these are legitimate functions of government that may be funded through a broad-based tax, equally applied to all. A sales tax or a business franchise tax are examples of this type of tax. A flat income tax could also be considered an example of this.
Taxes Fund Government Expenditures
Over time, governments have developed many creative ways of taking your money. The types of taxes governments typically collect from people include:
- Individual income taxes
- Corporate income taxes
- Sales tax
- Use tax
- Excise taxes
- Personal and real property taxes
- Estate taxes
- Gift taxes
- FICA taxes to fund Social Security and Medicare
- Luxury tax
- Severance taxes
- User fees
- Consumption taxes
- Self-employment taxes
- Employment taxes
- Gas taxes
- And others
In Colorado, over the past 27 years since the passage of the Taxpayer’s Bill of Rights (TABOR), the primary sources of state government general fund revenues have been:
Note that fully 91% of our state General Fund revenues come from just two sources: the sales and use tax, which generates about $3 billion, and the individual income tax, which generates over $8 billion or 65.7% of the total.
The statewide sales tax is 2.9%, and cities, counties, towns and other taxing districts impose their own sales taxes, creating a crazy patchwork of sales taxes around the state, making compliance difficult and imposing additional costs on businesses. Over the years, tax-raisers have tried asking Colorado voters for increases in the state sales tax and the voters have always said “No.”
Sales taxes are “regressive” taxes, which means that they are more punitive to those lower on the income scale because they will pay more, as a percentage of their income, for this type of tax.
It’s the income tax that I want to focus on for the rest of this discussion. With the passage of the 16th Amendment to the United States Constitution in 1913, the federal government began levying an income tax on U.S. citizens. The 16th Amendment states “The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
Income taxes are broad-based, in that they apply to everybody who receives income, whether it’s earned or unearned. Earned income is generally gained from employment, work and business activities. Unearned income is from investments and other sources not related to employment. Examples of unearned income are savings interest, dividends on stocks, bond interest, and alimony. Not only are “incomes” taxed, but capital gains are taxed as well, though usually at a lower rate.
A “progressive” income tax is one where higher levels of earnings are taxed at higher rates. The federal income tax is an example of this. As the table below shows, a single taxpayer will pay a 24% tax on the 84,201st dollar they earn. That means almost a full quarter of a person’s earnings over $84,200 goes to the federal government.
As an example of why voters should never give complete power to the Democratic Party, the last time the Democrats had full control over the Colorado state government was in 1936. That year they passed a bill to refer a constitutional amendment to the voters to create an income tax. The voters passed the measure by 167,268 to 159,143 on November 3, 1936.
For the first fifty years, the income tax had graduated rates like the federal income tax (with a top tax rate of 10% from 1947 to 1959), but that was changed in 1987 when the state legislature passed House Bill 1331, which established a flat 5.00% tax rate on individuals, estates and trusts. While the Republicans had solid control over the General Assembly that year, the bill was signed into law by Democrat Roy Romer.
The 5.00% income tax rate was lowered to 4.63% in tax year 2000 to reduce the TABOR surplus. It has been at 4.63% since then, though there was a bill in the General Assembly this past session to reduce the state income tax rate to 4.49%. Naturally, the Democrat controlled state senate killed SB 19-055 in committee.
The Wealth of States
In the United States we have fifty laboratories for public policy, so-called “laboratories of democracy.” This gives us the ability to look at how public policies like taxation affect people in the real world. We can see how people react to various incentives and what effect those incentives have on public policy goals.
The nature of income taxes is important to a state’s economic well-being. One reason why Colorado’s economy is so strong is because of our low, flat-rate income tax and because of TABOR, which limits the growth of government.
How do we know this? Because in 2014, renowned economists Arthur Laffer and Stephen Moore along with financial experts Rex Sinquefeld and Travis Brown published a book called An Inquiry Into The Nature and Causes of the Wealth of States: How Taxes, Energy and Worker Freedom Change Everything.
In this book, the authors take an in-depth look at how tax policies, energy production and worker freedom impact state revenues, the provision of state services, and net migration.
To measure the effect of income taxes levied in a state, they compare economic results in 11 states that adopted an income tax subsequent to 1960 with the results in states that have zero income taxes. The results are startling: without exception, the states that adopted income taxes fared worse economically than the states with no income taxes.
From Chapter One: “The 11 states that adopted a state income tax in the past half-century encompass a wide cross-section of American life, but do not include any states from the South or Far West. As it so happens, there are only three states in the South without an earned income tax—Tennessee, Florida, and Texas—and there are four states in the Far West without income taxes—Nevada, Wyoming, Washington, and Alaska. The other two states without earned income taxes are South Dakota and New Hampshire.
The 11 states that deserted the no-income-tax team are Maine, Rhode Island, Connecticut, New Jersey, Pennsylvania, West Virginia, Ohio, Indiana, Illinois, Michigan, and Nebraska. At the time the income tax was adopted, each of these states believed the economic damage done by the income tax would be minimal and that the increase in public services would be considerable. They were dead wrong!,” (Laffer, Arthur B. An Inquiry into the Nature and Causes of the Wealth of States, Wiley—Kindle Edition).
As the table below shows, without exception each of the 11 states that adopted income taxes have raised their income tax rates (indicating that there is not a limiting principle when it comes to tax increases in the absence of a TABOR-like restriction), lost population by 18% to 50%, lost gross state product (GSP) by 19% to 57%, and that despite the imposition of the income tax, each state saw their total state and local tax revenues decline.
Chapter One of the book goes on to review the economic results in selected states in more detail. The authors show how higher tax rates can result in lower revenues (“You can’t balance a budget on the backs of the unemployed or collect tax revenues from people who leave your state. High tax rates are a double-edged sword. You collect more, of course, per dollar of income, but you get less income. Each and every one of the 11 states that imposed an income tax saw a decline in its share of the total of the remaining 39 states’ state and local tax revenues. Michigan, for example, had total tax revenues fall from 6.62 percent of the remaining 39 states to 3.57 percent.”)
The authors also review how higher tax rates result in lower provision of public services including public education, police, fire and welfare services. It’s a pretty shocking indictment of higher taxes and a cautionary tale for politicians everywhere.
With regard to energy development, states that foster and promote energy development tend to fare better economically than those that don’t.
The same is true with corporate income tax rates. Colorado, as one of the 11 lowest corporate income tax states, enjoyed 46.9% GSP growth in the ten year period from 2002 to 2012 with a 15.5% population growth.
The final factor the authors review is “right-to-work” laws. According to the National Right to Work Legal Defense Foundation, “The Right to Work principle…affirms the right of every American to work for a living without being compelled to belong to a union. Compulsory unionism in any form…is a contradiction of the Right to Work principle and the fundamental human right that the principle represents.”
Currently, 23 states are considered as right-to-work states, and these states significantly outperform the 27 forced-union states in terms of population growth, net domestic in-migration, nonfarm payroll employment, personal income, GSP and state and local tax revenues. The table below shows these differences. Perhaps most significantly, the right-to-work states had higher gross state product (59.1%) than the forced union states (45.4%), a 30% positive variance.
As a forced-union state, Colorado is at a competitive disadvantage, and this shows in the numbers above.
Minimum wages, too, are a disadvantage for states that have higher than the federal minimum wage. As the table below shows, The 19 states with higher than federal minimum wages have lower metrics as well. Colorado, as one of those 19 states is at a disadvantage from this public policy option as well. What’s worse is that thanks to HB 19-1210 local governments in Colorado can set higher minimum wages, which will put them at a competitive disadvantage to their neighbors.
When it comes to these public policy choices, Colorado ranks better than many states due to the flat 4.63% income tax that we have. However, we are at a relative economic disadvantage as a forced-union state with higher than federal minimum wages. We are also going to experience economic headwinds in the future due to the hostility of the current Democrat power structure’s hostility to the oil and gas industry which will result in lower future severance tax receipts.
On an annual basis, the American Legislative Exchange Council, in conjunction with Dr. Arthur Laffer and Stephen Moore prepares a report called “Rich States Poor States” which ranks the 50 states based on 15 public policy variables. These policy variables are:
• Highest marginal personal income tax rate
• Highest marginal corporate income tax rate
• Personal income tax progressivity
• Property tax burden
• Sales tax burden
• Tax burden from all remaining taxes
• Estate/Inheritance tax (Yes or No)
• Recently legislated tax policy changes
• Debt service as a share of tax revenue
• Public employees per 10,000 residents
• Workers’ compensation costs
• State minimum wage
• Right-to-work state (Yes or No)
• Tax or expenditure limits
For 2019, Colorado ranked 17th in the nation for (future) economic outlook despite ranking 4th in (past) economic performance. Here’s how our state was measured in terms of the 15 public policy variables outlined above.
As the table shows, we rank fairly well in terms of marginal personal and corporate income tax rates – which I believe is directly attributable to TABOR. We rank first in tax expenditure limit (again, thanks to TABOR) and in the fact we have no estate/inheritance taxes. When we look at other areas, we fall far down the scale, including the fact we have higher state minimum wages, are not a right-to-work state, and have high debt service as a percentage of tax revenue.
These public policy choices, while they may be arcane and boring, have real impacts on the quality of life of actual people including you and me. While Colorado does rank well in terms of economic performance, our ranking for economic outlook is not so good, and has been slipping in recent years. I think that we have some areas for concern, especially with progressives in charge at the state capitol. Their efforts to undermine and repeal TABOR are especially concerning, as are their efforts to unionize the state workforce, raise minimum wages, impose new taxes (disguised as “premiums”), and other progressive policy goals.
Life in Colorado
Thanks to capitalism, people thrive when they are able to keep more of what they earn. They will move from high tax states to low or no-tax states. They will favor right-to-work states over forced-union states. In the Wealth of States the authors bring this point home by comparing a high-tax, progressive state (California) to a zero income tax, more libertarian state (Texas). In every single measure of economic performance, Texas far outperforms California. I would say that the people who live in Texas are flourishing on a higher level than Californians. They are better served by their governments, and they are able to keep more of what they earn. The fact that more people vote with their feet by moving from California to Texas (and other states) is proof positive of this.
In the public policies they promote, Colorado Democrats clearly wish for Colorado to follow in the same path as California. However, we would be better served by emulating Texas instead. What this means at the ballot box is up to each individual voter to decide.
The Wealth of States and its sequel Wealth of States: More Ways to Enhance Freedom, Opportunity and Growth are well worth the time and money investment to read, study, ponder and share. The Rich States, Poor States website contains a wealth of information on how public policies can have real impacts on our lives. I encourage everyone, especially activists and elected officials to read these books and study the information therein.
I encourage everyone else, who just want to live their lives and keep more of what they earn through the productive use of their minds, to study Proposition CC and vote “No”; and even more, to vigorously defend TABOR. It’s all that’s keeping us from sliding further down the scale. Nobody wants that.