The Handout List: How Dependent Is Your State on Uncle Sam’s Generosity? The per capita state tax burden doesn’t tell the whole story. To get a fuller picture, you need to get a handle on the flows of money between a state and the federal government. It comes down to this question: Do the individuals and businesses in your state send more money in taxes to Washington than the state gets back? You want that answer to be yes — as unfair as that might sound. This is a critical factor in deciding where your American Oasis will be. Think about it — when Washington’s credit card gets cut off, it’s going to create a desperate scramble for extremely limited federal funds. Politicians are going to make hasty, politically driven decisions about who gets a piece of a rapidly shrinking pie… and who gets crumbs. Let’s make this a little more concrete: Say you’re in your early 50s and you’ve built up a good-size nest egg. Your job is such that you can work from anywhere, and the kids have left home. You like to fish. You buy a house on the lake in Tennessee — where there’s no state income tax. Tennessee looks very good on the Debt List, at No. 45. But… for every $1 its residents and businesses send to Washington in taxes, Uncle Sam sends back $1.27 in benefits and programs. That’s testament to the bargaining power of Tennessee’s congressional delegation… but what happens when Uncle Sam no longer has access to endless easy credit? Tennessee’s a relatively small state. Not that many voters there. A presidential election probably won’t hinge on Tennessee’s 11 electoral votes. The point is that in a crisis like the one that’s looming, when politicians suddenly have a lot less money to dole out, some places are going to start looking expendable. Uncle Sam might very well tell Tennessee, “Sorry, you’re on your own now.” Could Tennessee carry on with no state income tax if Washington told the state to fend for itself? Suddenly that fishing-hole lifestyle could become a lot harder to keep up. We’re not saying that’s exactly how the situation would unfold… but we are saying it’s another thing to think about when selecting your American Oasis. With that in mind, we turn to a 2007 study by the nonpartisan Tax Foundation. It compared the federal tax burden in each state with all the federal spending that comes back to the state — whether it’s grants for federal programs, wages for federal employees or Social Security and Medicare payments. The results are presented in an easy-to-understand format: For every $1 a state’s taxpayers send to Washington, how much comes back? Now you see how some of those states at bottom of the Debt List — like South Dakota — achieve their low tax burdens: They’re getting more from Uncle Sam than they’re sending in — sometimes far more. Likewise, while Connecticut ranks No. 1 on the Debt List, it’s also No. 48 on the Handout List. At this point, you might despair of ever finding an American Oasis. It seems as if the states that look good on the Debt List look bad on the Handout List… and vice versa! Don’t worry: In just a moment, we’ll sort it out for you. But there’s a third factor we need to consider… one you can’t afford to ignore. The Pension List: Your Personal Tab for a State’s Pension Promises So far we’ve considered the taxing and spending and money flows that occur on a year-to-year basis. Here’s something more long term to think about: The official national debt is $16.4 trillion. But that figure is dwarfed by Uncle Sam’s future obligations to Social Security and Medicare — by one estimate, $62 trillion. By the same token, the states have their own massive future debt burden hanging over them — pension, health care and other benefits for retired state employees. The Pew Center on the States calls this “the trillion-dollar gap.” In a landmark 2010 study, it found the 50 states have $3.35 trillion in obligations to retirees… and only $2.35 trillion on hand. How did they get in such a mess? Lots of ways… For starters, they expanded benefits without considering the long-term price tag or how to pay for them Then, many states began balancing their annual budgets using the quick fix of borrowing from pension funds. Problem is, they never replenished the funds they borrowed And the icing on the cake: Many pension funds assume their investments will get 8% annual returns, because that’s been the average over the last 25 years. Unfortunately, in the most recent 10 years, returns have been closer to 3%. In a 2011 study, professors Joshua Rauh at Northwestern University and Robert Novy-Marx of the University of Rochester figured out how high taxes would have to rise to fully fund each state’s pension plan for the next 30 years. And then they broke it down to the annual cost per household… Of course, these are hypothetical figures, not guarantees. States might raise taxes. They might cut pensions. They’ll likely do a combination of both to fill these yawning gaps. But all else being equal, your American Oasis should be a state where that annual per household figure is lower. If the 2011 teacher protests in Wisconsin are a harbinger of what’s to come, you want to keep the potential for conflict to a minimum. The Medicaid List: No. 1 Problem State Governments Can’t Afford to Fix that Will Cost You Big A bipartisan blue-ribbon panel called the State Budget Crisis Task Force recently spelled out six major problems facing state governments. No. 1 was spending on health care for the poor. Medicaid takes up 24% of a typical state’s budget, the biggest single line item, now eclipsing education. “Medicaid is now such a large part of state spending,” says the task force report, “that the imbalance… can no longer be absorbed without significant cuts to other essential state programs like education or unpopular tax increases or both.” Yes, higher health care costs are a factor. But rising enrollment is a bigger one. Chronic long-term unemployment means “the increases in Medicaid spending were greater than in previous recessions,” the report says. But wait, you say: Doesn’t the federal government foot a substantial part of each state’s Medicaid bill? Yes, it does. The problem is that the federal subsidy is contingent on how much the state spends. “States have to essentially spend Medicaid dollars to get Medicaid dollars,” as The Washington Post pithily puts it. If you’re wondering whether the new health care law will make matters worse, the answer is yes. “States are deciding whether to expand their Medicaid programs to cover the uninsured poor as part of the new health care law,” says The New York Times, “with the federal government pledging to pay the full cost at first.” The key words there are “at first.” Putting It All Together — Where Are the American Oases? So… now we have all three factors worth considering in selecting your American Oasis: What’s the overall state government debt per person? Does a state send more money to Washington than it gets back? How high would taxes have to go to keep a state’s pension fully funded? Unfortunately, it’s not as simple as looking at the “top 10” on all three lists (actually, the bottom is where you want to look) and seeing which states turn up consistently. Not one state manages that distinction. So… let’s broaden our scope a little bit. Ideally, we want a state that… Has total per capita debt below the national average of $1,297 Sends more money to Washington than it gets back (or at least isn’t too far out of balance the other way) Has annual per household pension obligations below the national average of $1,219 Even then, there are other variables to consider — which is why one state that doesn’t look so hot across the three lists nonetheless makes the final cut. Ultimately, this is a subjective call. So we’re not ranking the American Oases. Each state’s situation is unique, so we present the Oases in alphabetical order: Florida: Florida has long attracted both retirees and working-age folks looking for new opportunities… and the American Oasis analysis finds new reasons it will continue to: Even with all those Social Security recipients, Washington sends back only 97 cents for every $1 sent in by state taxpayers. What’s more, Florida is slightly below the national average on the Debt List. And it’s a nice low ranking of No. 40 on the Pension List. In fact, the Pew study finds Florida’s pensions are — for the moment anyway — 101% funded. Of note for retirees: If Florida’s too hot, too crowded, too whatever, consider Georgia. Not only is it next-door, you find the Peach State near Florida on all three of the lists. And starting next year, taxes on retirement income in Georgia will be phased out. Indiana: The Hoosier State comes in at rock bottom on the Pension List, with a burden almost 40% smaller than runner-up Arkansas. And it’s in the bottom 10 on the Debt List. Yes, it’s above the waterline on the Handout List, taking in $1.05 for every $1 its taxpayers send to Washington, but that’s not an outrageous imbalance. New Hampshire: The Granite State has an outstanding showing on the Handout List at No. 47. It also looks respectable on the Debt List, and below average on the Pension List. That’s an unusually solid combination. And all that with no state income or sales tax. Live free or die! Texas: Texas is a solid performer on the Debt List at No. 40. It’s below the $1 threshold on the Handout List. True, it’s slightly above the national average on the Pension List, but the Lone Star state’s diverse economy should help to keep a truly serious crisis at bay… and if it arrives, we’d imagine the state retirees would take a haircut long before Texans stand for a state income tax. Wyoming: On the surface, Wyoming doesn’t look all that attractive. It’s extremely high on the Pension List. It gets $1.11 from Washington for every $1 it sends in. But it has a rock-bottom ranking on the Debt List. What’s more, much of the state’s tax burden is carried by the energy and mining industries. Even if Washington sends that you’re-on-your-own message to Wyoming, the state stands a reasonable chance of holding things together without instituting an income tax… or increasing its 4% sales tax. Ed. Note: This was a tough call, since Colorado also makes a compelling case if you’re looking for that mountain hideaway. Like Wyoming, its pension obligations are steep, but it’s in the bottom 10 on both the Debt List and the Handout List. Ultimately, Wyoming’s lack of income tax tips the scales. And Now… The Five Worst… Our selection of the five worst states — the Anti-Oases — was easier to put together… for reasons that will become apparent when you review it: California: Please, tell us you’re not surprised by this one. The state issued IOUs instead of checks to its creditors in 2009, and it may have to do so again in 2011. Yes, California gets back only 78 cents for every $1 it sends to Washington, but by our other two measures, it’s abysmal: No. 7 on the Debt List and No. 6 on the Pension List. Worse, income taxes are among the highest in the nation; the top rate of 9.55% takes effect after the first $46,767 of taxable income. Illinois: You’ve probably seen the headlines: Woefully underfunded pensions. State vendors waiting months to get paid. A 60% income tax increase. What more do you need to know? A California-type performance on the Handout List doesn’t make up for a California-type performance on the other two. New Jersey: Yes, New Jersey sends far more money to Washington than it gets back; it has the best showing of any state on the Handout List. Unfortunately, that’s all it has going for it. It’s No. 1 on the Pension List, and No. 4 on the Debt List. And thanks in part to sky-high property taxes, the Tax Foundation says New Jersey has the highest combined state and local tax burden in the country. Ed. Note: Wherever you find New Jersey on our lists, New York isn’t far behind. In the wake of the 2008 financial crisis, New York enacted some of the biggest tax and spending increases in state history. New Mexico: Nothing against the Land of Enchantment, but it’s higher than average on the Debt List, No. 1 on the Handout List and in the top 10 on the Pension List. Stunning desert vistas notwithstanding, no other state performs so poorly across all three of our lists. Oregon: Oregon is another state that looks good on the Handout List, getting back only 93 cents for every $1 it sends in to Washington. But it’s No. 9 on the Debt List and No. 3 on the Pension List. And that’s despite a staggering 11% tax on incomes above $250,000, the highest in the nation. It’s only a matter of time before the Beaver State enacts a sales tax. You won’t want to be around for that. Now, when it comes to the Medicaid List, we don’t see big problems ahead for the five states we identified as best equipped to ride out the coming economic storms. Florida, Indiana, Wyoming, Texas and New Hampshire all come in below the national average of $1,166. Our two “alternatives” of Georgia and Colorado both lie near the bottom of the list. New York, though? Ouch… Your Next Step Maybe you’re not in a position to pick up stakes and move right now. Maybe you’re considering it within the next couple of years. Or maybe you’re ready to leave wherever you are yesterday. The American Oases analysis can’t be the last word on where you choose to end up. Undoubtedly, you’ll want to consider factors like climate or proximity to relatives. But with the looming end of an economy built on easy credit… and an uneasy transition to whatever’s coming next… we hope this report makes you think about some factors you hadn’t thought about before. Whatever you choose to do, we hope you can create an American Oasis for yourself… wherever you happen to be. Good luck!
Posted on: Mon, 08 Jul 2013 03:47:23 +0000
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