Taxes and the Downward Spiral

Near the end of World War 1as the war was lost, the Imperial German Naval leaders created a plan for the entire Imperial navy to said out to seek a final, apocalyptic battle with the British fleet. It was to be apocalyptic in that the German admirals knew they could not win such a battle, but the defeat of the Imperial navy would save the “honor” of the Imperial navy. Fortunately, the crew of the fleet got wind of the proposed battle and mutinied thus not only stopping the battle but also acted as the spark which ended up forcing the Kaiser to step down from his throne and go into exile.

Let’s have some fun and bring the story above up to date and replace the players. For the German admirals with the mad plan, let’s have the state assemblies of the United States who are constantly thinking up new taxes. For the crew of the fleet, we shall use the citizens of those states. In our little scenario, the assemblies of many states decide to institute a state income tax and a surtax on the “wealthy” all in the name of equity but in reality, to collect more taxes for the ever-growing largess of the states. Next, we examine the effects of higher taxes.

The results are truly amazing and glaring and include the following points which are only a sample of the changes:

1. Eleven states have instituted income taxes since 1960.  These states are West Virginia, Indiana, Michigan, Nebraska, Illinois, Maine, Pennsylvania, Rhode Island, Ohio, New Jersy and Connecticut. While as late as 1970 these states accounted for about one third of national production, they now only provide about one fifth of national production.
2. The taxes of those states are aimed not only at the “wealthy”, but also at the middle class. In California for example, the”9.3% income tax rate starts at an income of $72,724 which is less than the median income in the state for a single earner ($76,190)”.
3. In a failed attempt to battle homelessness and fund universal pre-school, Portland’s Multnomah county placed surtaxes on those who are already paying the states 9.3% top tax rate (for singles, $125,000), which is the average salary of a Portland police officer. Since then, homelessness has increased and employment has declined.
4. On the other hand, low tax states have been welcoming hundreds of thousands of new residents fleeing the high tax states. Major corporations such as Tesla, Chevron, Oracle and others have moved to these states and as a result, these states report strong growth rates, such as Texas (10%), Florida (8.5%), Alabama (4.3%, etc., while New York reports a growth rate of -1.3%, Oregon of -3%, California -1.2%.

Like the common sailors of the Imperial fleet, the average citizens of high tax states have taken themselves out of harms way. With each citizen that leaves a high tax state, that state comes perilously close to entering a death spiral. Each productive citizen takes his or her expertise and tax dollars with them, leaving behind those lower on the productivity ladder and even those who depend on the largess of the state which will refuse to learn the lessons of their actions. Most likely, rather than correcting the error of their ways, they will double down on raising taxes which will only lead to an increased scramble for the exit doors.

Sources: The Growing State Tax and Jobs Divide, WSJ, A14, 4/15/2926 and How to Hollow Out Your State’s Economy, WSJ, A13, 3/18/2026