WSJ story exaggerates "price" of taxing the rich, cherry-picks data

April 6, 2011 — With an attention grabbing headline warning about “the price of taxing the rich,” a subhead explaining that “the top 1% of earners fill the coffers of states like California and New York during a boom — and leave them starved for revenue in a bust,” and an obliging former California economic forecasting official ready to say that “the root of California’s woes is its reliance on taxing the wealthy,” a recent Wall Street Journal article will undoubtedly be brandished in tax fights both in Washington and in state capitals across the country.

But none of it adds up. And, interestingly, one needn’t go beyond the four corners of the Journal’s “Saturday Essay” feature to figure that out.

The article discusses year-to-year volatility in the earnings of the wealthy, and, pointing to bust years, observes that such volatility is reflected in lower income tax receipts than in boom years.

Tax policies that reflect “overdependence on the rich” and that have become what the article also describes as a “curse” for states surely demand to be changed, don’t they?

But the article itself points to a study from the same former California official which found that the “average income of the top 20% of Californian earners (households making $95,000 in 1998) jumped by an inflation-adjusted 75% between 1980 and 1998, while income for the rest of the state grew by less than 3% over the same period.”

In other words, despite any year-to-year volatility, the longer-term trend demonstrated what is by now a rather well-known fact: high earners have consistently been the households where tax revenue can most easily and reasonably be found. So when Tom McClintock, a Republican member of the U.S. House of Representatives is quoted as saying that, “A flatter, broader tax rate would help stabilize the most volatile of California’s revenues,” he is effectively proposing that the state be starved for revenue — and the wealthy get a windfall — in good times and bad.

When the article, to prove the folly of relying on taxation of high income, states that “New York, New Jersey, Connecticut and Illinois — states that are now the most heavily reliant on the taxes of the wealthy — are now among those with the biggest budget holes,” it must have been hoping that readers wouldn’t review the data presented in the chart that accompanies the article.

Turns out, for example, that New York and Connecticut were two of only eight states whose personal income tax receipts went up from 2007 to 2009. California’s receipts did drop by almost 17 percent, but Arizona — a state with a smaller percentage of income tax revenues from the top 1 percent of earners — had receipts drop by more than 31 percent (a reflection of Arizona’s economic meltdown).

And three states with state finances in appalling condition — Florida, Nevada, and Texas — impose no personal income tax at all.

14 paragraphs into the story, we do learn that state budget shortfalls “have other causes, of course, from high unemployment and weak retail sales to falling real-estate values and the rising costs of health-care and pensions.”

And then we hit pay dirt in paragraph 22: there is an eminently sensible approach to the matter, which is the establishment and maintenance of rainy-day funds. Yes, it is true, as the article points out, that doing so is politically difficult, and even states who have them tend not to fund them sufficiently. But the need for budgetary prudence exists largely independent of a state’s reliance on the wealthy for a large percentage of its revenues.  Other factors — not least of which is the question of whether there is a massive national or regional recession — have played and will continue to play a role.

As the article points out: “Economists and state budget chiefs say the best hedge is better planning.”

That doesn’t require a flat tax or a no tax state. “Massachusetts, which saw a 75% drop in capital-gains collections during the recession, won plaudits from ratings firms and economists for crafting a rainy-day fund in 2010 using future capital-gains revenues,” the article reports.

That’s Massachusetts, a state that, according to the chart accompanying the article, lost a smaller percentage of receipts from 2007 to 2009 than the average state (its receipts are listed as shrinking 7.02 percent), and a state that in 2007 relied on the top 1 percent of earners for a higher percentage of income tax revenues than all but five other states.