Which 'sinkhole states' are most at risk from the GOP tax bill?
Forbes financial writer William Baldwin asks which "sinkhole states" will have the biggest headaches from the GOP tax bill:
These are places where the population dependent on the state – for employment, welfare[,] or a pension – is larger than the population feeding it. That excess of takers over makers is recipe enough for trouble when the next recession hits. But now some of the sinkholes have a new worry.
The Trump tax law enacted in December just about killed the federal deduction that prosperous people take for state income taxes. In states with stiff taxes, the cost of living has suddenly gone up.
Baldwin, a former editor of Forbes magazine, has compiled a list of "sinkhole states" having a "Feed Me Ratio" over 100 and a net out-migration of taxpayer income: "[s]inkholes also have a Feed Me Ratio worse than 100. The ratio is the population of takers for every 100 makers."
Baldwin next computes a "Soak 'em Score" to see which sinkhole states depend most heavily on high-income taxpayers to pay the bills. The Soak 'em Score is the "percentage of state tax revenues coming from people with incomes over $500,000." Those tax revenues are "vulnerable" under the new federal tax law, says Baldwin: "[n]ot every high earner can relocate, but a lot can."
Baldwin's formula finds that four high-tax blue states – California, Connecticut, Illinois, and New York – are sinkhole states at the greatest financial risk under the new tax law:
California: Feed Me Ratio: 134, Soak 'em Score: 25.5
Connecticut: Feed Me Ratio: 103, Soak 'em Score: 26.3
Illinois: Feed Me Ratio: 116, Soak 'em Score: 10.4
New York: Feed Me Ratio: 118, Soak 'em Score: 30.1
The table included in Baldwin's column, also posted at realclearmarkets.com, also shows New Jersey, with a 22.7 Soak 'em Score, just missing the Feed Me Ratio cutoff for sinkhole state status. With a newly elected "proudly progressive" governor, look for New Jersey to make up for lost time on the sinkhole state list.
Four red states – Alaska, Louisiana, Mississippi, and West Virginia – qualify as sinkhole states under the Baldwin formula, but with relatively few wealthy taxpayers, those states have very low Soak 'em Scores.
Mr. Baldwin also highlights the staggering levels of unfunded pension liabilities in the sinkhole states. Using more conservative interest rates than the "wishful rates used by state actuaries," Baldwin says Illinois is "in the hole" for $361 billion on state pensions, and California is some $769 billion in the hole for pensions. "If you live in a sinkhole state, be wary of the home-state municipal bonds[.]"
Mr. Baldwin's Soak 'em Score analysis may not be too popular in certain state capitals, whose politicians may finally have to pay the piper.
Steve Moore, writing at washingtontimes.com, says, "Americans will go to great lengths to lower their taxes," and, now that the federal deduction for state income taxes has been cut back, "[s]o will politicians":
The blue[-]state governors have argued for many years that their high tax rates don't cause people to move – even though the two highest income tax states, California and New York, have each lost about one million residents to other states over the past decade.
But now that their high tax rates are no longer tax[-]deductible the incentive to leave is magnified and these governors like Andrew Cuomo of New York are leaping into action.
Cuomo and other blue-state governors, says Moore, are "examining whether they can convert their income taxes into payroll taxes," "threatening to sue the federal government," and "investigating whether their states can convert income tax payments into tax[-]deductible charitable contributions to the state government."
"Good luck with that," Moore adds.
Moore concludes that "politicians like Mr. Cuomo and California's [Governor] Jerry Brown" can either "try to conjure up more short-term gimmicks to ease the coming tax hit" or "stop complaining and start taking competitiveness seriously by cutting their excessive taxes and spending."
Baldwin at forbes.com says the "harsh reality of the new tax law will sink in when 2018 tax returns are filed fifteen months from now," and Moore adds that if blue-state sinkhole politicians don't get their houses in order, "they will see right before their very eyes how taxes matter as moving vans whisk taxpayers from blue[-] to red[-]state America at an accelerated pace."