Federalism—the independent authority over their own affairs that is retained by the states—was designed by the Founding Fathers as a counter-balance to the centralized power of the federal government. But I’m not sure they realized the full extent of its advantages.
The independence of the states allows some of them to adopt policies that move in opposite directions from others, so that within the framework set by federal policies, some states can erect bigger, more expensive, more intrusive governments, and others can create smaller, cheaper, and less intrusive governments.
This allows states to create different models of government—which produce different results. Successful models will invite emulation by other states, while other models will serve as cautionary tales.
But there’s more to it than that. In a modern society where transportation costs are low and the population is much more mobile—Americans have always been restless, but it is now easier than ever to pick up and move—this means that people can vote for what kind of society they want to live in, one closer to the original American system, or one closer to a European welfare state. They can vote, not just with their ballot, but with their feet—and their dollars.
That’s why I recommended, after November’s election, that the best way to lower your tax burden in the age of Obama may be to move from a high-tax state to a state with low (or no) taxes, which in many cases would more than make up for the recent increase in income taxes.
A lot of people are figuring this out.
Fox Business reports on an influx of financial firms relocating from New York to Florida, where they can enjoy a better quality of life—along with no state income tax.
Meanwhile, California is actively chasing high-tech entrepreneurs out of the state with a retroactive tax increase.
Since 1993, California entrepreneurs and early-stage investors have enjoyed a partial state income tax exclusion on sales of stock of a “qualified” small business. This was an incentive for people to start and keep businesses in California. If they sold their company, they would only have to pay half of the regular state tax rate on what they gained—about 4.5% instead of 9%. That could include founders of companies such as Instagram and Yelp.
The [Franchise Tax Board] announced its decision last December, and the ruling went into effect earlier this year. Now, not only will stockholders have to pay the full tax rate on capital gains, which has risen to about 13%, but they’ll also be billed retroactively for 50% of the taxes they excluded. The FTB says this will affect over 2,500 people and bring in about $120 million in revenue.
Ethan Anderson, co-founder and CEO of startup MyTime, says the FTB’s actions will make entrepreneurs think twice about setting up a business in the state….
Anderson says the ruling felt like “a slap in the face,” especially since entrepreneurs like him have helped drive much of the state’s economy. “Who else is creating the jobs? Why would they hurt us like this?” asks Anderson. “The next time I start a business, it most probably won’t be in California.”
It might just be in Texas. Anderson says he already knew of at least one California entrepreneur who had bought a house there to establish out-of-state residency. The Lone Star state is home to Austin, one of the fastest growing tech hubs in the country. Unlike other hubs like New York and Boston, it offers lower taxes, less regulation, and relatively inexpensive real estate.
This isn’t just talk. Texas has been inundated with inquiries from California businesses.
According to the Greater Austin Chamber of Commerce, since the passage of Prop 30 in the November election [an increase in California’s personal income tax], California-based company relocation inquiries have doubled, possibly tripled, in Central Texas. West Coast entrepreneurs feeling the personal financial stress of an out-of-control state budget and tax policy have heard Texas’ message, and they’re responding.
For now, this is a trend that is counteracting the nationwide lurch toward bigger government. Over the long term, over a period of decades, it also has the potential to trickle up to the national level, as states with a more small-government approach increase in population and therefore in congressional representation and Electoral College votes.
Capital, as they say, tends to go where it is well-treated. So does population—and, therefore, political power.