Coming back from vacation to dismal jobs news inspired me to attempt putting together some economic analysis of my own. I started with an article from Barron’s that ranked states from a financial health perspective. I overlaid that with a presentation done by a member of my LinkedIn alumni group that ranks various aspects of state tax policy in terms of friendliness to taxpayers. I had this theory that fiscal health and physical health were similar in the “no pain no gain” area. You eat nothing but doughnuts and watch TV then you look and feel like Homer Simpson. You eat vegetables and chop your own salads, and then you still have plenty of energy to count your money. Or something like that… Anyway – it wasn’t true.
California scored on two of Aaron Skloff’s worst states for “….tax” lists, and they also got the worst spot on Barron’s shakiest credit list. However, New Hampshire tilted toward the tax friendly side of the ledger, and it sits right next to tax-unfriendly New York on Barron’s shakiest list. Actually as an accountant I should be the first to know that you need to look at both sides of the entry. It’s not just how much you collect in taxes – it’s also how much you spend.
Barron’s also brought in unemployment as a factor to consider – needless to say unemployment lowers tax receipts regardless of the rate. However, taxing tough didn’t pay or hurt in terms of jobs. The states with no income tax had an average unemployment rate of 8.1%. The top 5 states in terms of income tax rates had an average unemployment rate of 8.2%. One area with a little correlation was sales tax (a recent favorite topic of mine). The states with no sales tax had an average unemployment rate of 7.5%, and the states with the 5 highest sales tax rates had average unemployment of 8.9%.
Clearly I should stick with accounting, and not move into economics. The experts in that field added two more points in the Barron’s article that are worth noting. First is that federal budget cuts will have disproportionate impact in states with many federal contracts (AAA rated Virginia gets almost 30% of state GDP from Uncle Sam and Maryland isn’t far behind).
Last and most importantly, there is no number that indicates the willingness to introduce structural change into state spending. That is the essential ingredient in fiscal stability, and probably the most relevant component of how one would rate a muni bond. Sigh.