Several states, including Republican states, have decided to raise taxes this year to cover budget shortfalls. But a new study suggests that the states might find themselves in worse financial shape after the money starts rolling in.
According to the latest ranking of states by the Mercatus Center at George Mason University, the most fiscally sound states in the nation are all low-tax, GOP strongholds, while the 10 least-solvent states are almost all high-tax and heavily Democratic.
The rankings in the fourth-annual “Ranking of the States by Fiscal Condition” report, which was released this morning, are based on a review of audited financial statements for 2015 covering five measures that gauge the states’ ability to pay bills, avoid budget deficits, and meet long-term spending needs and cover pension liabilities.
Cash solvency, for example, measures a state’s ability to pay immediate bills. Budget solvency focuses on whether states will end the year with a surplus or deficit. Service-level solvency gauges a state’s ability to meet a demand for increased spending. Long-run solvency looks at a state’s ability to meet longer-term spending commitments. Trust-fund solvency looks at the states’ unfunded pension liabilities and state debt.
There were several changes in the rankings from last year. Florida moved from sixth place to first, while Alaska dropped from first place last year to 17th this year, driven mainly by the fall in oil prices. Idaho moved into the top 10.
At the bottom of the heap, Louisiana and West Virginia both dropped down in the 10-worst list, while Hawaii greatly improved, going from 45th place last year 27th this year. Connecticut, Maine and New York also climbed out of the bottom 10 list. But New Jersey fell to dead last from last year’s 48th place.
The report also includes rankings for each individual measure of fiscal solvency, in addition to the overall ranking. Some states do well on some measures, and bad on others. New Jersey, for example, is last on long-run solvency and second to last on budget solvency, but ranks 24 on service-level solvency.
Nearly bankrupt Illinois is in the bottom in all but one of the five individual measures — service-level solvency.
The Mercatus report doesn’t include data on the states’ political leanings or tax burdens, but the implication is clear.
Of the 25 most-solvent states, all but four are solidly Republican. Of the bottom 25 states, all but five are solidly Democratic.
The most fiscally sound states also tend to have the lowest tax burdens, according to a separate analysis by the Tax Foundation, which measures state and local tax burdens as a percentage of state income.
The average tax burden among the 10 most fiscally sound states is 8.5%, according to the Tax Foundation’s 2017 report. The average tax burden among the 10 least fiscally sound states: 10.2%.
Here’s another way to look at it: Of the 15 least-solvent states, 10 are among the 15 states with the highest tax burdens.
Only one of the worst performing states — Louisiana — has a tax burden that is below 8% of income. And not one of the best performing states has a tax burden above 9.6%.
Of the nine states that raised taxes this year, four of them are bottom ranked — none are in the top 10.
The bottom line is that the more money the state government takes from taxpayers, the worse it handles it.
This should serve as a flashing warning to any state that thinks it can tax its way out of its fiscal problems.
The entire Mercatus Center report can be found here.
