Monday, October 3, 2016

Taxpayer Return for 2016

This is my late recap of Wallethub's 2016 taxpayer return on investment by state.

Source: WalletHub

There are some very interesting points that can be inferred by looking at this graph. It is striking how clear the political divide on taxes shows up when comparing states. Most states that have relatively low tax rates and worse government services are Republican. Directly opposite that, almost every state that has relatively high tax rates and better government services identifies as Democrat. The exceptions to this rule are: Florida (which is pretty evenly split politically speaking), and Wyoming and North Dakota which both have significant energy revenue to spend on services while being Republican dominated states. These combinations make sense and are understandable to the layman: higher taxes reduce incomes but result in better government services and the preference for higher income or good public services divides along well known political lines. However, West Virginia is one of six states in this graph that suggest its citizens are being taxed at relatively high rates AND receiving poorer public services. Its brothers in ignominy include: California, New Mexico, Arkansas, Delaware, and Alaska. Those are three blue states and three red states, so this is not a political divide - it is simply poor governance. On the opposite end of the spectrum, some citizens enjoy good government services and lower tax rates. Those states are also a mix of predominantly Republican and Democratic citizenry. New Hampshire ranks as the best mix of lower taxes and better services with South Dakota close behind them. Colorado and Virginia seem to do a good job of balancing tax rates and services as well.
Tax rates are easy to measure and rank. Public services are inherently more difficult to quantify and rank and Wallethub's methodology can surely be questioned. (Funnily, WV was ranked #1 in water quality in 2015 yet this year it was not in the top five best. I wonder if that had anything to do with the Freedom Industries spill a couple years ago.) But they do attempt to provide people with a broad indication of what their tax dollars do for their community. For example, Wallethub uses educational rankings as 20% of the total composition of this score. WV has the 16th highest spending rate on education but only the 45th best outcome on a broad measure of education indicators (dropout rates; reading & math scores; SAT & ACT scores; pupil-teacher ratio; school safety). So higher spending on education is not resulting in better educated kids. Hence, either spending does not result in better education outcomes or WV is spending money on things in the education budget that do not aid outcomes. To provide another contrast, Indiana has the fourth lowest spending rate on education and the 12th best ranking.

Source: WalletHub

It is also difficult to determine how much public spending can help economic outcomes. The economic data used for this ranking includes: the unemployment rate; median household income; the annual rate of job growth; the percentage of residents below the poverty line; and economic mobility. Most of these indicators can be good or bad based on preexisting conditions that cannot be altered by state government spending. State funds can create a lot of government jobs, but it cannot exactly spur private business development as politicians like to claim it can. Thus, a state with declining industries will dampen economic outcomes and leave the state with less tax revenue for reasons outside of the government's control.
Infrastructure, which accounts for 20% of the services rank, is the area where spending should most closely result in a better ranking. If you build a new bridge, presumably, you have a nice new and safe bridge. Hence, there is some connection between state spending and the quality of life in a given state. It is more difficult than assuming a one-to-one trade-off though. Higher spending at the state level is no guarantee of better life outcomes for its people.
If you are in one of the states that gets a low return for every tax dollar, and you live in a high tax rate state, there are a few things you can do. One obvious solution would be to move. This is not always possible for a long list of reasons, but given the opportunity it should be considered by more people. Another proactive step would be to vote down propositions to spend more money on education or infrastructure. Politicians may claim that they can spend their way into better outcomes, but if history shows this to be unsuccessful, the electorate should not be swayed by that argument. You could write to your state representatives to protest tax hikes as well. It is a taxpayer responsibility to not allow spending to grow unchecked. Citizens of WV (and Alaska, New Mexico, Arkansas, California and Delaware) should take some, or all, of the steps mentioned here.

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