I read recently a blog by Ann Alstott, a Professor at Yale Law School. One of Alstott’s arguments in there is that eliminating deductions for state and local property taxes, as the tax bills do, punishes the effective governance achieved in high tax states as a result of having higher property tax rates. In defending this argument, Alstott includes the interesting claim that the debate over eliminating these deductions “implicitly asserts that “high taxes” are a bad thing and disclaims any positive relationship between tax revenue and robust governance.”
This is a provocative and important claim if true. Is there any evidence, therefore, that higher tax states are more effective in achieving their purpose than their lower taxed peers?
As I see it, to evaluate this claim and its relationship to her argument about punishing effective governance, we must ascertain the objective truths to the following questions:
- How might we define or determine “effective governance”?
- Do “high tax states” have high property taxes, or does that burden fall elsewhere in their tax codes?
- Is there a clear relationship between the characteristics delineated for number one above and those identified for number two after it?
The term “effective governance” could mean many things to many people. For example, a small government conservative might evaluate the size and scope of the federal government (the smaller, the better) and its ability to maintain the delivery of “essential services” (e.g., a military, free markets, etc.). On the other hand, a traditional liberal might instead evaluate levels of social and economic equality, and the trade-offs made to ensure or attempt to realize such goals when determining “effective.” Whatever the rubric, such evaluations are rife with possibilities for dissension, and any attempt to assert one’s rubric will inevitably invoke ire from a differing perspective.
So in order to avoid the inevitable arguments stemming from this attempt to narrow the definition of “effective,” I have chosen to use the ranking of states by U.S. News and World Reports. According to its published methodology, U.S. News evaluated a total of 68 measures in nine broad categories. These categories included health, infrastructure, education, government, and economy, among others. For my purposes here, I will assume that these categories adequately encompass characteristics and/or outcomes that most Americans would accept as contributing to “effective” government, and that is significantly affected by the public policies of their state governments (which would include taxation rates).
If this list represents our “effective” schema, our next step is to correlate their rankings to their tax burdens – specifically, property taxes, since those taxes generate the most revenue for state coffers, and are the taxes whose deductions on federal taxes will be removed (thus increasing the real cost of one’s property). To correlate this list to tax burden, I looked at two sources. The first is a list from Forbes that uses tax rates from 2016. The second is a ranking from the Tax Foundation using measures form 2012. The last was a list published by Realtor Magazine of the 10 states with both the highest and lowest property tax rates, respectively. If we compare these lists, we find the following:
- Only two of the top ten “best” states are ranked by both tax burden lists in their top respective top tens (MN[6,8], MD [7,7), and one came really close (VT [9,11]).
- Only two of the top ten “best” states were identified in the top ten of property taxes (NH, VT).
- Eleven of the top twenty “best” states are within the top sixteen states with the highest tax burdens.
- Five of the ten states with the highest property taxes fall within the top twenty “best” states ranking.
From this, we can reasonably conclude that the tax burden in these best states usually falls elsewhere in their tax codes. As such, most of these “best” states (fifteen of the top twenty) will not see significant changes to their revenue from the elimination of these property tax deductions. In other words, most of the highest tax states gain revenue from other portions of their tax code and are less likely to be affected by the elimination of these deductions.
What is also clear, however, is that many of the “best” states do burden their residents with more of a tax burden than others. According to these lists, eleven states of the top twenty “best” states are within the top twenty states with the highest tax burden. Because the measures identified by U.S. News require revenue from taxes to operationalize, it is fair to conclude that these higher taxed states use their revenue to effective ends. To put another way, they spend their money appropriately (understood as spending on those activities that are most necessary to be an effective government). As such, Professor Alstott appears to be correct: high taxes do not mean bad government. In many cases, high taxes mean effective government, if not in most states.
To be clear, this is not to imply that the converse is also false; that low taxes equate to ineffective governance. Several of the states on these lists provide counterpoints. For example, New Hampshire is ranked as the second “best” state while also being ranked as one of the top ten in lowest tax burdens (it is ranked as having the fourth highest property tax rates).
So don’t buy the lie that taxes are bad. Instead, when left to states, taxes can be a very good thing.