Tax Reform And The Blue State Model
/It was not long before I started this blog in 2012 that Walter Russell Mead of the American Interest began writing about what he dubbed the "blue model" of government, and his prediction that that model was "on the way out." When applied to the states, the term "blue model" referred to the combination of relatively high taxes, high state spending, and extensive regulation typical of Democrat-leaning states like California, Illinois, New York, New Jersey and Connecticut. Mead's prediction was that the combination of the information revolution and competition from lower-tax and lower-regulation "red" states would put the blue model under increasing pressure and force reform.
Almost six years later, the "blue" states have only doubled down on their policy model. None of those states have seen any significant cutbacks on state programs. During this period California and Connecticut have actually raised their income tax rates on top earners. In the competition against other states, California appears to be doing relatively well, although its population explosion has slowed substantially. In New York, Connecticut and New Jersey the population has been almost completely flat in recent years. Illinois has actually experienced a population decline since 2010, but only a slight one. Meanwhile, the big "red" states, like Texas and Florida, have grown rapidly. But the very slow and gradual relative decline of the big blue states so far has not created any significant motivation to do anything different.
Could that be about to change? As of January 1, the state and local income tax deduction will mostly be gone. Suddenly there will be a significant shift in the competitiveness between the high-tax "blue states" and the lower-tax "red states." Will this lead to any serious rethinking of the "blue state model"?
I'm betting against it. The basic nature of the blue state model is to put in place various government handouts and favors to specified groups, who thereupon become dependent on the handouts and favors and will fight to the death to keep them as is. Given the overall disinterest of most of the electorate, the recipients of the handouts and favors come to exercise effective control over the political process.
Consider a couple of examples. Generous pensions for state and local government workers are a hallmark of the blue state model. Not that the red states are pure on this issue. But if you look at lists of states ranked by amount of aggregate unfunded pension debt, or by amount of unfunded pension debt per capita, or by percentage of pension obligations that are unfunded, the big blue states consistently appear at or near the bottom of the list. A December 2017 Report just out from the American Legislative Exchange Council contains rankings of the states on all of those measures. In funding percentage at the risk-free rate, Connecticut ranks dead last among the states at 19.7%; Illinois 48th at 23.3%; and New Jersey 46th at 25.7%. California and New York do better on that measure, but they are kingpins of aggregate unfunded pension debt: 50th place and $987 billion in the case of California (hey, it's less than a trillion!); and New York at 46th place and $345 billion. (To its credit, New York has been relatively honest in funding the pension obligations it has taken on. However, it has taken on ridiculously generous obligations, particularly as they concern early retirement ages for workers in many areas. The result is that pension contributions constitute a high and ever-increasing percentage of government budgets at both state and local levels.)
Are the blue states going to do anything soon to right their pension ships? New York and Illinois have provisions in their state constitutions that make revisions of pension accruals for existing employees difficult or impossible. (See my discussion of that issue here.) In California, there is no comparable constitutional provision, but the courts have imposed a rule of law that may amount to the same thing as a practical matter. Former San Jose Mayor Chuck Reed has led an effort to enact a ballot initiative that would overrule the court-made restrictions; but after getting off to a slow start, that initiative was pulled in 2016, and its backers are talking about another try in 2018. They will face major opposition from the public employee unions.
As a second example, consider obligations that blue states have taken on in union contracts. Again, the red states are far from pure; but generosity to public employee unions is one of the hallmarks of the blue model. Some insights into the nature of the problem can be found in a big New York Times spread today in the New York section, headline "What Would It Take To Fix New York Subway?" The impetus for the article is that a recent series of things like derailments and fires has brought calls for an emergency program to "fix" the subways. Mayor de Blasio, of course, has called for a new "millionaire's tax" to raise the funds. (Funny how he seems to have the exact same idea for how to "fix" every problem we encounter.) So, can we free up some money to "fix" things by bringing down the costs of operating the subway through automating the function of running the trains? They are well on the way to doing that in London and Paris:
London is upgrading its fleet to become automated in the mid-2020s. In Paris, driverless trains are in operation on two lines.
So how about in New York?
In New York, the L train [one of some 26 lines] is the only line where the new traffic control system has been fully implemented and where trains could, in theory, be automated. But after a brief experiment using only one train operator in 2005, the M.T.A. had to bring back two-person crews to the L after losing a labor dispute.
Yes, we have at least some trains fully equipped for automated operation, but we use not one person, but two to run them. The union insists! Oh, and our costs of building new extensions of the subway system run five to ten times international norms. So, sorry, no money is available for the emergency "fix."
Basically, what the "blue model" comes down to is spending far more money to get the same or worse results. We spend far more than national norms on healthcare, for no better health outcomes; and far more (more than double) national norms per student on K-12 education for no better outcomes. But the costs are all locked in place and nearly impossible to control or reduce.
So what will be the result of the tax reform? My prediction: the process of relative decline will be somewhat accelerated -- from very, very slow, to merely very slow. Likely, new "millionaire's taxes," like the one de Blasio has been proposing, will go off the table. But don't look for any immediate declines in the existing tax structure, unless there are a large number of departures of the wealthy suddenly announced.
UPDATE, December 27: Turns out that the Daily Caller had a post yesterday on the amount of outmigration from the big blue states, headline "Nearly 450,000 People Fled These Three Deep Blue States In 2017." The three states in question are California, Illinois and New York. The post is sourced from Census data that came out on December 20. Key quote:
Three Democratic-leaning states hemorrhaged hundreds of thousands of people in 2016 and 2017 as crime, high taxes and, in some cases, crummy weather had residents seeking greener pastures elsewhere. The exodus of residents was most pronounced in New York, which saw about 190,000 people leave the state between July 1, 2016 and July 1, 2017, according to U.S. Census Bureau data released last week.
The outmigration from California was 138,000, and from Illinois 115,000. In the case of California and New York, they were able to replace the departures with immigrants from abroad.