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The Failure of Progressive “Blue State” Economics

posted on April 9, 2018

Progressives in Iowa are arguing that both Governor Kim Reynolds and the Senate Republican tax reform proposals would lead Iowa into a fiscal “train wreck.” Iowa Democrats have said if Republicans in the legislature lower tax rates the result will be a budget disaster similar to what occurred in Kansas. Iowa’s progressives are following a policy program known as the “Blue State” model, which “incorporates high levels of public employment, extensive and expensive public services, and high taxes and comprehensive regulations on business.”

“The harm done by excessive regulation, taxes, and public expenditures plays itself out time and again in liberal bastions…, noted constitutional scholar Richard A. Epstein. Connecticut is one example where the “Blue state” model has failed. Connecticut, which is known as a wealthy New England state, is in a severe fiscal crisis. After several tax increases in recent years Connecticut has failed to resolve its budget crisis and unfunded pension liabilities. Recent projections are forecasting that Connecticut is facing a $197 million budget deficit. Connecticut has a government spending problem and their entitlement programs are severely underfunded.

“Connecticut has raised income and other taxes three times in the last four years and still has one of the most debilitating budget deficits in the nation,” argued economists Stephen Moore and Arthur Laffer.

Stephen Eide, a Senior Fellow at the Manhattan Institute, states that the Connecticut’s pension system is underfunded by $27.5 billion and over $20 billion in unfunded health-care liabilities. The tax increases and budget crisis has not only failed to resolve the economic problems, but it is driving people and businesses out of Connecticut. One of the more symbolic examples of this was General Electric relocating to Massachusetts.

“Connecticut could serve as Exhibit A for the risks involved in trying to run a progressive tax system in an era of high and rising “fixed” costs (entitlements, retirement-benefit costs, and debt service),” wrote Eide.

If Connecticut is Exhibit A, Illinois is Exhibit B of a fiscal disaster in a “Blue model” state. The Land of Lincoln suffers from high taxes, and just as with Connecticut, is fiscally bankrupt and losing population. David Keene, an Editor at The Washington Times, notes that people are “fleeing Illinois in jaw-dropping numbers because its citizens have the unique distinction of residing in one of the worst governed and most over-taxed states in the country.”

California is another “Blue model” state suffering from self-inflicted fiscal crisis. High taxes, excessive regulations, and poor fiscal management are causing people and businesses to leave the state. Investor’s Business Daily reports that an estimated “155,000 taxpayers out of 15.7 million pay half of all the state’s income taxes.” This system of “progressive” taxation is not sustainable. In addition to the already reckless spending policymakers in the state are considering a $400 billion per year single-payer health care system, which would only solidify the state’s bankruptcy.

Stephen Moore and Arthur Laffer describe the exodus of people from high tax states as “one of the greatest demographic stories in American history.” Other “Blue model” states such as Minnesota may not have such a dire economic situation as Connecticut, Illinois, and California, but they are experiencing lower levels of economic growth. The “North Star” state is often held up by progressives as a model to follow, but over time high taxes and excessive regulations are creating more harm. To reflect on how high Minnesota’s tax rates are the lowest income tax rate of 5.35 percent is higher than the highest tax rate in 23 states!

“The progressive tax and spend agenda has been put on trial. Not only do the policies lead to much slower growth, they also benefit the rich and politically well-connected at the expense of everyone else,” argues Moore and Laffer.

The “Blue state” model has clearly failed. Many states and localities are not prepared for the next economic recession.  Steven Malanga, senior editor of City Journal, recently wrote, “states and cities haven’t been this unprepared in decades for the next economic slowdown.” Whether it is public pensions, escalating Medicaid costs, education funding, or other programs many states are struggling to finance the increasing costs and demands of government.

Iowa’s progressives are calling for more “investments” in multiple policy areas such as education and healthcare. The argument is that Iowa is not “fully funding” vital state programs and services. Iowa certainly is struggling with recent budget reductions due to less-than-projected revenues, but taxpayers need to remember that the siren song of “investment” and “fully funded” are code words for more spending. To spend more money Iowa must either raise taxes or create economic growth, which will generate new taxpayers.

The failing example from Connecticut and other “Blue model” states demonstrates that raising taxes to finance more government will not improve state government. In addition, higher levels of government spending do not necessarily translate into better services. Iowa policymakers and taxpayers should reject the siren call for more “investments” in government.

Our history is filled with examples from both the federal and state level that governments cannot tax and spend their way to prosperity. Iowa policymakers need to not only enact policies that will work to create economic growth and opportunities for all Iowans — but also prepare us for future economic downturns.

By lowering tax rates across-the-board and controlling spending, Iowa will not only create a stronger economy with more opportunities, which will also provide for the priorities of state government.