Taxes aren't everything in economy

December 26, 2007|By JAY HANCOCK

Virginia crushes Maryland in Economic Ranking of All 50 States" was the provocative headline on last week's announcement by a pro-markets, pro-limited government research group.

That's true - if you don't measure poverty, education, business creation, household income, homeownership growth, venture-capital investment, broadband access, major league sports, cultural opportunities, sprawl and pollution.

Other than those areas, in which Maryland does better than Virginia, this is a terrible state in which to live, raise a family, hold a job and own a business.

As you might guess, the study by the American Legislative Exchange Council gave states favorable marks for low taxes, low wages and not much else.

But low taxes aren't everything, or else Mississippi would be a thriving corridor of biotech startups and investment banks. Economies need reasonable taxes and investment in brains, bodies and infrastructure. Any study that pretends otherwise isn't worth the 4 megabytes it takes on your hard drive.

"The historical evidence is clear," says the report, by economists Arthur Laffer (of "Laffer Curve" fame) and Stephen Moore of The Wall Street Journal. "States that keep spending and taxes low exhibit the best economic results, while states that follow the tax-and-spend path lag far behind."

That must explain the brilliant success of South Dakota, Wyoming and Tennessee, each ranking in the Exchange Council's top five states.

Virginia was No. 6, getting plaudits for its low minimum wage and lack of inheritance tax as well as middle-of-the-road corporate and personal taxes. Maryland was 32nd ("19th worst," said the news release) and would have done even more poorly if the study had taken Gov. Martin O'Malley's recent tax increases into account.

You can certainly draw a pattern of low-tax states doing well in recent years, and Laffer and Moore have done so. Utah, No. 1 on their list, boosted its employment base by a fourth over the past decade. No. 2 Arizona performed even more spectacularly, increasing jobs by almost 40 percent.

But the pattern is by no means uniform. And as trained economists, the two should know that statistical correlation does not equal causation.

Federal water subsidies, air conditioning and retirees fleeing northern winters have as much to do with Sun Belt growth as low taxes. Texas and the Rocky Mountain states are thriving because of high oil prices, which are more or less indifferent to the personal income-tax level.

The study approvingly quotes Forbes magazine publisher Rich Karlgaard. "The most valuable natural resource in the 21st century is brains. Smart people tend to be mobile. Watch where they go. Because where they go, robust economic activity will follow."

That could be Maryland's motto. Maryland is No. 4 in per-capita college graduates, No. 3 in doctorate-level engineers and scientists and No. 7 in the recent increase of high-school graduates. (Citations and links for all these rankings can be found on my blog. Go to The Sun's home page, scroll down to the "Blogs" box and find it in "Choose a blog.")

You don't get a work force that smart by skimping on education. What businesses hate even more than taxes is trouble finding qualified employees. A smart work force is one reason Maryland is No. 1 in household income, No. 1 in research and development and No. 8 in venture capital investments.

"No state has ever taxed its way to prosperity," says the Exchange Council's study.

Actually, a persuasive argument can be made that North Carolina did.

In 1959 it was one of the poorest places in the nation, ranking 45th with a median family income 30 percent below that of the country as a whole. In the early 1960s Gov. Terry Sanford raised taxes and hugely increased spending on public education, from kindergarten to graduate school. Ungrateful voters tossed him out after one term.

Today, North Carolina has one of the best higher education systems in the country. Family income is only 11 percent less than that of the nation and ranks 39th - ahead of every southern state except Texas, Florida and Georgia. If North Carolina's Research Triangle gives Maryland a run for the money in biotech research and venture capital investment, Terry Sanford and investment in education are two reasons why.

Maryland's situation today is the opposite of North Carolina's in 1959. Thanks to buckets of federal spending on war and homeland security, Maryland rose to No. 1 in household income last year. But the recipe for the future is the same. Cutting taxes and starving public assets of capital is not the way to compete.

The best preparation for the post-boom era is what Maryland is doing: intelligently investing in education, transportation and quality of life.

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