Vermont's giant sucking sound: Residents flee government bloat

In 1992, Ross Perot famously stated that NAFTA would cause a "giant sucking sound" as jobs and industries fled the U.S. for Mexico.  For years, progressive Vermont's bloated bureaucracy has increased regulations, social programs, and income and real estate taxes in the fantasy that the rich can just be taxed more to achieve every imagined social good.  But the COVID-19 crisis has pulled aside the fiscal veil, and now the Green Mountain State is careening into the red.  A "giant sucking sound" is heard from Vermonters fleeing the state.

Vermont has stubbornly avoided funding its state pension system.  It "boasts" the second highest per-pupil school costs in America, the fourth highest health care costs, and the fourth highest welfare benefits.  Unsurprisingly, it also distinguishes itself as the 49th worst business climate and the only state to have its credit rating downgraded in 2019 — when economic times were relatively good.

Liberals scoff at supply-side economics (the idea that cutting taxes causes a "trickle-down effect" that boosts investment, income, and ultimately tax receipts).  But taxes do matter.

Vermont's state economists now caution that the state could lose $430 million in tax revenue next year due to this crisis, which is a lot of money when the population is merely 628,000 (the real number is likely much higher).  As Vermont weighs how to fill in that gap, an analyst with the government warns, "[I]f lawmakers don't find another source to replace the lost revenue in the education fund, property taxes would have to go up dramatically in the next fiscal year."

Of course, that's just the education fund!  And while Vermont wrangles to secure federal funds to bail itself out, blames the virus for its woes, and shelves its ambitious plans to implement new gasoline taxes and subsidies for electric vehicles (to save the planet!), it shuns the very concept of reduced government spending. 

Many Vermonters have already packed up and fled.  More are preparing to do so.  If there is a mass exodus, property prices may plummet, allowing wealthy out-of-staters to buy up properties cheaply — that is, if they are prepared to shoulder those skyrocketing real estate taxes.  (Vermont ranks sixth highest property taxes in the nation but 23rd in median income.)

According to that much-derided "trickle-down theory," raising taxes can at some point actually reduce tax receipts.  The Laffer Curve represents the effect on behavior of rising tax rates.  At some point, raising taxes decreases rather than increases government revenue:

A business is more likely to find ways to protect its capital from taxation or to relocate all or a part of its operations overseas. Investors are less likely to risk their capital if a larger percentage of their profits are taken. When workers see an increasing portion of their paychecks taken due to increased efforts on their part, they will lose the incentive to work harder. Put together these could all mean less total revenue coming in if tax rates were raised.

The Laffer Curve predicts that at some point, increased taxes do cause people to change behaviors in a way that undermines tax revenue.  Vermont is well past that point by every standard — and people are leaving.  It's not the wealthy fleeing, but the common workers and businesspeople who see greener tax pastures over most all neighboring state fences.  Reducing taxes in Vermont by reducing expenditures would help these residents, not imaginary tycoons who don't reside here.

As workers and retirees are compelled to tighten their belts to endure the COVID-19 impacts on the economy, the shocking idea might occur to Vermont legislators that some belt-tightening by government is in order.  Otherwise, that giant sucking sound of Vermont homeowners fleeing for friendlier tax climates will increase in volume.

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