The U.S. Census Bureau released its once-in-a-decade national census on April 26. Most of the discussion about the census has focused on states losing or gaining seats in the U.S. House, a process known as reapportionment.
For the 2022 midterms, seven states will be down one member of the House: California, Illinois, Michigan, New York, Ohio, Pennsylvania, and West Virginia. Colorado, Florida, Montana, North Carolina, and Oregon each gained one seat, with Texas netting two.
States that consistently grew faster than the national average over the past ten years are in line to gain representation in Congress while those that lag are at risk of losing clout. States add population three ways: have more births than deaths (referred to as natural increase), attract more people from other states than move out (known as domestic migration), or attract migrants from other nations (both legally and illegally).
For some 20 years, more Californians and New Yorkers have left their respective states than have moved into them from elsewhere. Being in the top three most expensive places in which to live, coupled with the nation’s highest income taxes, has something to do with that.
California and New York have also seen declines in their birth rates, as high housing costs are a major deterrent to family formation. Lastly, both states did see fairly strong gains from international immigration until the last few years. For a time, this offset those states’ losses in sluggish natural increase and domestic outmigration.
Lower Taxes Encourage Growth
Most domestic migration is due to shifting national employment patterns. States with higher costs—land, labor, taxes, regulatory compliance, and energy—lose out to states with lower costs. Some industries are more immune to these pressures, such as New York’s financial sector and California’s Silicon Valley.
The tax rate differentials between the states were amplified after the Donald Trump tax cut in December 2017. This change to the tax law capped the state and local tax deduction (SALT) to $10,000 per filing household.
Some 30-40 percent of federal individual income tax filers itemize their deductions. Before the change, taxpayers could take an unlimited deduction on their property taxes and either their sales taxes or income taxes. This federal tax policy provided a subsidy to high-tax states by dampening the advantage held by low-tax state and local governments.
Changes were immediately seen in job creation among the states after the tax cut. In the four years prior to the 2017 tax cut, private-sector job growth in the 27 states where the average 2016 SALT deduction was under $10,000—the low-tax states—ran a modest 30.5 percent higher than in the high-tax states.
But the 2017 tax cut put a turbocharger on job creation in the low-tax states, with job growth from December 2017 to December 2019 on the eve of the COVID-19 pandemic hitting 4.5 percent in the low-tax states compared to 2.2 percent in the high-tax states, an astounding 107.8 percent advantage. In manufacturing, the low-tax states saw job growth of 3.5 percent compared to 1.3 percent in the high-tax states, a growth rate advantage of 176.4 percent.
High Taxes and Tighter Lockdowns
Of course, the advent of COVID-19 put an immediate halt to the economic boom unleashed by the Trump tax cuts. Even so, high-tax states reacted far more aggressively in imposing lockdowns than did low-tax states, although the severity of the lockdowns and associated pain in job losses and business bankruptcies made no beneficial difference in the course of the virus.
Looking at job growth from the 2017 tax cut to March 2021, the latest month reported, shows that low-tax states lost 0.02 percent of their private workforce compared to high-tax states, which are still down 5.1 percent, some 99.6 percent greater job losses than in the low-tax states.
Put another way, had the high-tax states only lost jobs at the same rate as the low-tax states, there would be 2.2 million more people employed in the private sector in those 23 states. Over time, as people move to find work or a better job, those 2.2 million jobs would support about 6 million people—enough population to account for eight U.S. House seats.
States that tax more tend to regulate more than do low-tax states. Burdensome regulations can be just as harmful to job formation as high taxes.
Freedom Leads to Growth
Every year, Canada’s Fraser Institute leads a multinational team of economists and public policy experts to rank the level of economic freedom in states and nations. Their Economic Freedom of North America report for 2020 rated the states with three fundamental factors: government spending, taxes, and labor market freedom, with the latter category looking at things such as the minimum wage, the percentage of government employees working as a share of total employment, and the prevalence of labor union membership.
Fraser ranked Florida as the second-freest state, Texas as No. 3. Florida was the seventh-fastest growing state, Texas had the third-highest growth rate.
At the other bottom of the ranking—the anti-freedom states—Fraser ranked New York as 50th, California 49th, Alaska 48th, West Virginia 47th, and Vermont 46th. All of the bottom five that could lose a congressional seat did—Alaska and Vermont only have one at-large member and thus could lose no more.
In fact, not one state in the bottom 15 for freedom ranked in the top 10 fastest-growing states. And not one state in the top 15 for freedom ranked in the slowest-growing bottom 10 states.
You Can’t Count People Who Aren’t There
Trying to make up for the anti-growth consequences of their anti-jobs policies, some states spent heavily to augment their census numbers. California spent $187 million—about $4.73 per capita—on advertising and grants to nonprofits who assured the state’s substantial population of illegal aliens that there was no threat of being deported in responding to the census.
New York allocated $60 million for a similar effort, but fell 89 residents short of not losing a seat. In the week prior to census day on April 1, New York was losing 291 people every day to COVID-19. Had Gov. Andrew Cuomo not so badly mismanaged his state’s COVID-19 response by sending infected seniors to assisted living homes, his state might have kept its congressional seat.
But you can’t count someone who’s already moved away. Freedom matters and—along with a nice climate, natural resources, and access to trade—largely determines the long-term growth trajectory of a state.
Redistribute the Consequences of Bad Choices
But the Biden-Harris administration can largely erase competitive differences among the states. President Joe Biden has so far resisted calls from his Democrat congressional allies to reinstate the full SALT deduction for high-earning taxpayers in blue states, but an agreement might be struck as part of a federal tax increase package. If so, depending on the details of any new federal tax law, it may erase a significant portion of interstate tax competition.
There are other Biden-Harris threats to red state advantages. A ban on fracking would hit oil- and gas-producing states particularly hard. A carbon tax would be particularly harmful to West Virginia, oil and gas states, and manufacturing.
A federal minimum wage hike would hit low cost-of-living states, which also tend to be low-tax states. Federal labor law regulation could level labor freedom differences between the states.
Ongoing transfers of borrowed federal money to states and local government has so far favored high-tax states, which often have massive unfunded government worker pension obligations. These bailouts allow poorly managed states to continue to spend and tax more, delaying the inevitable fiscal reckoning.
Lastly, the federal government’s ongoing run at the dollar printing press threatens to ignite a round of inflation not seen since the late 1970s. This would monetize government debt—again, generally helping spendthrift, big-taxing states at the expense of states that have kept a more conservative fiscal house.
It’s highly unlikely that California Gov. Gavin Newsom, now officially on track for that state’s second-only recall election of a governor, will suddenly decide to cut the nation’s highest personal income tax rate or reduce the state’s crushing regulatory climate. Even if he did, a majority of the state legislature sits to his left—which is hard for non-Californians to comprehend. Instead, Newsom will likely lean into his progressive left ideology and call on fellow Californian Kamala Harris to rescue California by imposing its brand of aggressive, high-tax nanny-statism on the entire nation.
As Winston Churchill observed, “The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of Socialism is the equal sharing of miseries.”