Friday, May 9, 2014

Taxpayer Return on Investment

My attention was turned onto a report that ranks states according to the returns they provide to taxpayers. Economist Scott Sumner at The Money Illusion makes the observation that states with no, or low, income tax rates tend to rank better with regard to their public services. He checked for a political bias in the ranking organization, but found that Republican and Democrat leaning states were evenly mixed throughout the rankings. The organization providing the rankings is called Wallethub. Their mission statement says they provide financial information for consumers and small businesses. The report was produced by professors of political science, economics, and public policy at various universities across the country.
So what does the report say about West Virginia? The state ranked 46th of 51 (D.C. was included) in return on taxpayer money. The good news is that the tax rate rank is not oppressive. West Virginia was ranked 18th, top 35%, in terms of how much taxes its citizens pay annually. Wallethub estimated that the average West Virginian pays $6,598 annually in taxes, which is 5% below the national average. The bad news is that our overall government services rank 47th, according to this organization.
There are a few graphics that break down the metrics by government service. West Virginia is featured in two of them.

That is interesting given the chemical spill that tainted Charleston's water supply in January 2014, but before that West Virginia had been nationally ranked with the best water quality. It is assumed they ignored the recent spill and looked at the larger picture of the state's past and future water quality when conducting the report. More troubling is that WV was ranked last in terms of quality hospital systems. The explanation for this is not readily available. One could reason that the lack of health care options in rural areas across the state lead researchers to rank the state last. Their sub-metrics in determining health care provision were: the number of state and local hospitals per 100,000 residents; a public hospital system rank; the average life expectancy; the infant mortality rate; out-of-pocket medical costs; and the average health insurance premium. The average life expectancy could be more due to lifestyle choices, but the other areas are somewhat within the state's purview. And it can be noted that the quantity of hospitals does not always mark their quality. Still, a low health rating certainly made WV look like a bad return on taxes invested.
However, there is a bigger point to be drawn from this report. Could West Virginia improve its quality of public services by increasing or reducing the tax rate? Given that the state already collects below the national average in taxes, one might say that raising the tax rate to the national average or beyond could give the government more resources with which to improve health services, reduce crime, or build infrastructure. This makes good sense, but the state by state picture muddies this clear reasoning a bit.

Look at how convoluted this graph appears. Putting the same data into Microsoft Excel shows that there is a small negative correlation (-0.22) between lower tax rates and higher government services. But it is far from clear that higher taxes necessarily provide a state with better government services.

West Virginia would hope to move downward on the above graph. That would indicate better public services. The trend line would indicate that increasing taxes marginally would help that. However, the chart shows plenty of states with low taxes and high government service rates. Look at the cluster of five states in the lower left hand corner that rank in the top ten in low tax rates and in the top twenty in government services. Those states are: Wyoming, South Dakota, North Dakota, Washington, and Colorado. Of those states, South Dakota, Washington, and Wyoming have no income taxes. On the other end of the spectrum, the state with the highest tax rate rank, New York, has the 25th best public services. So New York has high tax rates and is in the middle in terms of services. California has the second highest tax rate rank and is 38th in public provisions.
Complicating the relationship further are states with high tax rates and highly rated government services. Iowa, Nebraska, and Vermont all rank in the top ten highest tax rates and provide top ten quality public services. All three states have a progressive income tax that is steeper than West Virginia's.
So what is the lesson from all this data? Should West Virginia lower or increase tax rates? And if so, which ones should it lower or raise? The main moral seems to be that rates are not as important as quality decision making. The efficiency with which a state government spends money is more important than the amount collected. Finding cost effective ways to improve infrastructure, schools, air and water quality, and health services is the best route. That is easier said than done though. Building bridges or hospitals takes money. Increasing safety requires better training or more officers or both. And improving education starts with better teachers and teacher training. It requires as much dedication from the populace to provide these services as it does the state to facilitate them. Teachers and police officers taking pride in their work and looking for innovative ways to improve their community are just as important as the politicians hoping to effectively parse through the tax code.

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