Taxation and Public Policies, Essay Example

Introduction

Government and state budgets do not only impact residents’ taxation, but also their overall life quality. Apart from tax rates and property prices, other conditions also contribute towards residents’ decision to move to another state. While many researchers have claimed that increased taxation alone can result in mass migration of wealthy individuals, according to Tannenwald et al., there is no solid proof to support the above statement. The below paper will review the taxation policy of two states: Massachusetts and Texas, in order to determine what makes residents choose to stay or relocate to another state.

Overview of Taxation Policies

Texas, considered to be a conservative state had a total of $249,912,209 IRS collections in the year 2013, according to the IRS Data Book FY2013. In comparison, the tax revenue of Massachusetts was $90,463,675. Comparing the population of the two states (6.595.300 for Massachusetts and 26,422,500 for Texas, the tax revenue per resident in Massachusetts is 1.5 times higher. Still, the median household income in Texas is $51,752, compared with $64,555 in Massachusetts. This indicates that the average resident of Massachusetts is richer, still pays more tax.

According to the Massbudget.org website (Wise & Rivera), several tax cuts have been issued in Massachusetts between 1998 and 2002. Tax increases were, however, initiated later in the 21^st century. Massachusetts has a flat income tax rate, with only one bracket, according to the website Taxadmin.org. In contrast, Texas has no state income tax, however, the rate of sales tax is 6.25 percent, the same as in Massachusetts. According to the Tax Foundation, the flat income tax rate of Massachusetts ranks the 21^st lowest among American states, and the state is the 4^th largest tax collector in the U.S. As a comparison, Texas has no tax, and a lower property tax: $1557, according to the same website (Tax Foundation).

Overview of Public Spending Policies

The unemployment rate of Massachusetts in 2013 was significantly higher than Texas’ (7.2 percent compared with 6.3 percent), according to the Bureau of Labor Statistics. Based on the measures of economic distress, foreclosure rates in Texas were higher than in Massachusetts, while there were significant changes in poverty trends: Between 2011 and 2012, monthly food stamp participation increased in Massachusetts by 5.5 percent, and declined by 1.2 percent in Texas. Texas ranked 50^th in the U.S. for economic distress, while Massachusetts was 13^th. (Kaiser Family Foundation).

Comparing the 2015 spending budgets of Massachusetts and Texas, it is evident that Texas spends much less on welfare programs (9.3 billion) of its over 27 million residents than Massachusetts ($6.7 billion, and 6.8 million residents). Health care spending in Texas was $37.8 billion, compared with $15.1 billion in Massachusetts. Education spending budget per resident was approximately at the same level, while Texas’ budget per capita for transportation was higher than Massachusetts’ (US Government Spending). This indicates that the two states engage not only in a completely different taxation policy, but their public spending preferences are different, as well. In the next part, the results and policies will be examined in detail.

Discussion

The population of Texas grew by over 20 percent in the past ten years, according to Index Mundi’s analysis. Massachusetts’ population, however, also grew by 3.1 percent, therefore, the existence of flat income tax does not make residents flee the state. Provided that many researchers assume that taxation makes individuals leave the state, it is evident that this is not the case. According to Tannenwald et al, house prices, living conditions, housing, infrastructure, and school quality influence residents in their decisions whether or not to move. As the authors (3) confirm: “It would not be credible to argue that no one ever moves to a new state because of the desire to live someplace where taxes are lower. But neither is it credible to say that taxes are a primary motivation, nor that migration has a large impact on the revenue impact of tax measures”. The above overview has shown that Texas’ poverty rate declined in the past year, and this might have triggered migration into the state, not only the lack of income tax. On the other hand, Texas spent more on welfare programs than Massachusetts, therefore, the overall life quality in the state is likely to be better and ever-improving. The average property tax within Texas was found to be significantly lower than in Massachusetts, and  this could have influenced residents’ state preferences. Looking at migration as an issue simply influenced by one aspect would be wrong. The overview of the two states has shown that several conditions, such as unemployment levels, housing prices, education quality, welfare programs, and government spending on public services influence individuals when selecting the state for their residence.

Lynch (47) found that “state and local tax cuts and incentives are not effective for stimulating economic activity or creating jobs in a cost-efficient manner”. This means that a business would make a decision regarding their state location based on a careful analysis of various factors: business climate, the pool of qualified potential employers, growth opportunities, and the presence of supporting industries. In some cases, businesses would decide to move into a state where unemployment rate is high, as they would have an advantage of selecting from a pool of qualified and motivated workers, and take advantage of federal tax incentives for employing the long term unemployed.

Findings

Texas’ growth rate is 4 percent, while Massachusetts’s is 3.2 percent, according to the US Government Spending website. This indicates that while Texas does not apply a flat rate income tax, it is still able to attract residents. However, to state that the lack of income tax is the only reason for population and state growth would be over-simplifying the issue. The average income in Texas is much lower than in Massachusetts, therefore, introducing tax cuts in Massachusetts would have a more significant impact on the state budget than it does in Texas. Further, due to the lack of income from capital gains and employment tax, Texas is spending less on welfare programs, despite the unemployment rate is still 6.3 percent. Health care spending was also lower in Texas than in Massachusetts.

Conclusion

The above review has revealed that the taxation policies and trends of Massachusetts and Texas differ in preferences, budgeting practices, and favor different types of residents. Massachusetts residents have a lower foreclosure rate, but a higher rate of unemployment. Still, the median household income is higher in Massachusetts. The significant differences in growth rates and state overall growth indicate that spending policies and investments influence individuals’ preferences more than taxation alone. As spending on pensions per capita in Massachusetts is significantly higher, while state debt is greater in Texas, indicating that the lack of taxation on personal income increases the deficit of public budgets. As Tannenwald et al. (15) stated: “In the face of a weak economic recovery, continuing state budget shortfalls, and likely cuts in aid to states by the federal government, tax increases can allow states to avert deep cuts in public services such as education and health care”.

Works Cited

Bureau of Labor Statistics (BLS), Regional and State Employment and Unemployment (Monthly); Table 3, Civilian labor force and unemployment by state and selected area, seasonally adjusted, as of October 21, 2014. Print.

Index Mundi. United States – Population growth rate by state. n.d. Web. <http://www.indexmundi.com/facts/united-states/quick-facts/all-states/population-growth#map>

Kaiser Family Foundation. Measures of state economic distress: Housing Foreclosures and changes in unemployment and food stamp participation. 2013. Web. <http://kff.org/other/state-indicator/foreclosuresunemploymentfood-stamps/>

Lynch, R. Rethinking growth strategies. How state and local taxes and services affect economic development. Economic Policy Institute. 2004. Print.

Tax Foundation. State and Local Sales Tax Rates in 2013. 2013. Web. <http://taxfoundation.org/article/state-and-local-sales-tax-rates-2013>

Taxadmin.org  State individual income taxes. N.d. Web. <http://www.taxadmin.org/fta/rate/ind_inc.pdf>

Tannenwald, R., Shure, J. and Johnson. N.  Tax flight is a myth. Higher state taxes bring more revenue, not more migration. Center on Budget and Policy Priorities. August 4, 2011. Print.

US Government Spending  Total spending. 2013. Web. <http://www.usgovernmentspending.com/compare_state_spending_2015bH0an>

Wise, K. & Rivera, M. (2015) Income tax cuts and the budget deficit in Massachusetts. 2015. Web.<http://massbudget.org/report_window.php?loc=tax_cuts_factsheet.html>