Treasury Secretary Nicholas Brady sees "the first tangible signs of a turnaround" in the U.S. economy.
Consumer and business confidence have picked up following the end of the gulf war, and home sales and housing starts have risen. The chance for an economic rebound, however, may be flattened by a wave of state and local tax increases that may soon be sweeping the country.What the New York Times calls "the booming 1980s" generated so much revenue from economic growth that state and local budget surpluses were commonplace during Reagan's terms as president. However, the Bush tax increase and regulatory burden have knocked the economy off its feet, and states, accustomed to a spending binge financed by the strong revenue growth of the Reagan era, now find themselves facing deep pits of red ink.
During the 1980s spending at the state level increased at about twice the rate of inflation, turning state capitals into the playgrounds for the same special interest spending lobbies that feed off the taxpayer in Washington. Just as the federal government has become unresponsive to voters, states now are going after taxpayers with a vengeance.
The Wall Street Journal recently quoted the Republican governor of Vermont, Richard Snelling, telling a business group: "We're going to tax everything you can conceive of, as much as you can conceive."
One thing on which economists agree, no matter their political persuasion, is that raising taxes in a recession is counterproductive. A second federal tax hike at this time would produce deafening protests from economists.
However, the aggregate effect of piecemeal and less noticeable state and local tax increases would be the same. Higher property taxes and state income and sales tax rates hurt incentives and take money out of the pockets of consumers and businesses just as effectively as higher federal taxes. Moreover, by reducing the values of commercial and residential properties, the property tax would contribute to the real estate depression that has destroyed so many banks and S&Ls, worsening the credit crunch that has made a strong economic recovery unlikely.
State and local governments have been on a hiring binge for years. Today they employ two to three times as many people per resident as they did in the 1950s, and the average salary of these employees exceeds the average income of the taxpayers who foot the bill.
During this same period the quality of public services has declined.
Just as businesses like to grow, so do governments. We shouldn't be surprised that so many politicians believe government should continue to grow faster than the economy that supports it. It is, after all, their business, and when revenues stall in a recession, politicians try to compensate by hiking tax rates.
But higher tax rates are not only costly to the taxpayers but also to the economy. Lacking a bottom line, government does not use resources efficiently. Neither does it produce goods or services that many people would be willing to buy.
Just consider the dismal history of New York City. Despite higher and higher taxes, the city is always broke. Last year New Jersey passed the largest tax increase in the history of the 50 states, and the state continues to sink in a pit of red ink.