ONE OF THE harmful effects of recent increases in state tax rates is that they have added to the problems of some of the states hardest hit by the recession. Older industrial states have had to raise tax rates to maintain even sharply reduced levels of public programs, because the recession sharply reduced revenues. Yet those same tax rises, on top of already fairly high tax levels, have made those states less attractive to investors whose businesses can provide badly needed jobs.
The politicians who have voted for higher taxes are quite aware of this. But they feel, and to all appearances their constituents agree, that such tax rises are preferable to the alternatives. It was apparent at the recent National Governors Association meeting in Maine that governors from all over the nation, in the hardest-pressed and in the fiscally most stringent states, have nonetheless sharply increased their spending on education--well before the federal politicians began talking about the issue.
Yet transferring responsibility for government programs from the federal to state level, as the Reagan administration wants to do, tends to put state governments into what can be a destructive competition to see which can keep taxes lowest. A state that wants to raise taxes for programs like education, whose benefits come in the long term, will suffer a serious disadvantage in the short term. Moreover, tax increases in states especially hard hit by the recent recession may depress their economies for an extended period, perhaps permanently.
Minnesota Gov. Rudy Perpich has one solution: to get state governments to pledge they won't raid each other's industries. He has gotten some other Great Lakes Democratic governors--Tony Earl of Wisconsin, James Blanchard of Michigan and Richard Celeste of Ohio--to agree. But governors aren't the only ones doing the raiding. And, while a lot of interstate moves by businesses are to nearby states, there is also some considerable movement from the "snow belt" to the "sun belt"--and not many sun belt governors are going to promise to stop seeking new industry from the North.
Of course, differences in state and local tax burdens aren't the only thing businesses consider when they decide where to locate; otherwise, every business in the country would be in New Hampshire or South Carolina by now. But policies that increase the difference between states' tax rates exacerbate the problem. The trend in the late 1970s was to compress the difference between the states in this regard; now the Reagan budget policies and the states' response may have the effect of widening them, and that is not a good thing.