Feb. 4 (Bloomberg) -- New Jersey is among the slow-population-growth states in the U.S., and an analysis of economic data shows that it shares a trait with other Northeastern states losing political power: high income taxes.
New Jersey’s population grew 4.5 percent to 8.79 million from 2000 to 2010 as its most prosperous areas were little changed, including Bergen County with a 2.4 percent gain, according to 2010 Census figures released yesterday in Washington. New York, Rhode Island, Vermont and Maine had increases ranging from 0.4 percent to 4.2 percent, less than half the 9.7 percent national rate.
Those states also have income-tax rates of 6.5 percent or more, some of the highest in the U.S., according to a report by the nonpartisan Tax Foundation in Washington. That contrasts with high-growth states such as Nevada and Texas, which have no income tax. While taxes aren’t the sole barometer of why people move to a state, some economists and politicians see a link.
“The census data make it quite clear that high-tax states aren’t growing compared to other states,” William Dunkelberg, the chief economist of the National Federation of Independent Business, who is based in Philadelphia, said. “States are like firms: Bad management equals loss of capital and people. Good management attracts capital and people.”
The census data released yesterday provide the first detailed look at changes in state population demographics since 2000. New Jersey, Virginia, Louisiana, and Mississippi are the first to receive census figures because their election cycles are among the earliest in the U.S.
Economists and demographers agree that people choose where to live based on complex evaluations of job opportunities, housing costs, education and other considerations.
Some politicians see the tax rate as a way to stoke growth and signal responsiveness. New Jersey Governor Chris Christie in September proposed cutting the state’s top income-tax rate to 6 percent from 9 percent to boost economic growth.
Last week, he said he plans to try to recruit businesses from Illinois, which raised its tax rate on Jan. 12, and he bought full-page ads in Illinois newspapers promoting New Jersey. He’s also promised to control the growth of the highest property taxes in the U.S.
“What’s going to help economic growth and create private-sector jobs is to have a stable government, working not by increasing debt and increasing taxes but by making sure that we create the necessary business climate that will allow the private sector to pick some of that money there by the sidelines right now,” Christie said in a Bloomberg Television interview Jan. 25.
‘One Less Voice’
As Northeastern states lag behind the South and West in growth, they lose congressional seats. New Jersey is losing one seat as a result of the 2010 Census, while New York is losing two. By contrast, Texas is gaining four, Florida two and Nevada one.
“For those in power, any loss of clout is viewed as a loss,” said Patrick Murray, a political scientist who heads the polling institute at Monmouth University in West Long Branch, New Jersey. “We have one less voice.”
The tax burden has become a key element in growth rates, said Charles Lieberman, chief investment officer at Advisors Capital Management LLC in Hasbrouck Heights, New Jersey. New Jersey also has the nation’s highest property taxes, according to the Tax Foundation, a research group.
“The correlation is very impressive” between taxes and population, said Lieberman, former head of monetary analysis at the Federal Reserve Bank of New York. “The tax rates of the 10 slowest-population-growth states are very high,” and “the fastest growers are among the lowest tax rates.”
Higher state taxes can prove to be a good investment if they are targeted at improving education, which can draw employers, said Donald Ratajczak, chief consulting economist at Morgan Keegan and Co. in Atlanta. He cited Minnesota as an example of a high-tax state that has grown its population by attracting good-paying jobs.
“If you take taxes and use them for high-quality schools and safe communities, then people will stay,” he said.
An indicator of economic health by the Philadelphia Fed shows some other contrasts between no-income-tax states and high-tax states.
Most states with no income tax did better in all measures of growth from 2006 to 2010, while most higher-tax states did worse than the national average.
State economic indexes compiled by the Philadelphia Fed for New Jersey, Rhode Island, Maine, Vermont and California all trailed the U.S. average. The indexes include employment, hours worked in manufacturing, the unemployment rate, and wages and salaries. Two states with high tax rates, New York and Iowa, outperformed the U.S.
“High tax rates do have a long-term impact on the growth rates,” said Steven Cochrane, director of regional economics at Moody’s Analytics Inc. in West Chester, Pennsylvania. “But taxes alone can’t have a strong impact. It is a combination of taxes, housing costs, school quality, the cost of doing business, transportation access and quality, and labor force quality, among other factors.”
‘Work From Anywhere’
David Kotok, chairman and chief investment officer for Cumberland Advisors Inc., an investment firm that manages more than $1.5 billion, moved last year from Vineland, New Jersey, where he lived and worked, to Sarasota, Florida, which has no state income tax. The New Jersey income tax is applied proportionally, which discourages him from spending time at hotels or eating out while in the state, Kotok said. He spent fewer than 90 days in the state last year.
“In today’s technological world, more and more people can do their work from anywhere,” Kotok said. “If the income leaves, you are not going to be able to tax it.”
A poll by Monmouth University released in April found 53 percent of New Jersey residents would like to move from the state at some point, while 43 percent want to stay the rest of their lives. The number wanting to move compares with 49 percent in 2007. Among those making more than $100,000 a year, 60 percent wanted to move, the poll found.
Share of U.S. Population
New Jersey’s share of the U.S. population has been declining since 1970, according to an October 2007 study by Rutgers University researchers. The 2010 Census showed big cities in the state have low or no growth.
Newark, the most populous city, added 3,500 residents to reach 277,140, a 1.3 percent increase since the 2000 Census. Jersey City grew to 247,597, adding 7,542 residents or 3.1 percent from 2000. Paterson, the third-largest city, lost about 3,000 residents to 146,199, or 2.0 percent over the decade. Elizabeth grew by 3.7 percent to 124,969 and Edison grew by 2.3 percent to 99,967 in 2010.
The state has suffered a “loss of competitiveness,” said Joseph J. Seneca, a Rutgers economist. “New Jersey’s population and economic growth were tepid at best and below the national rates even in the good years of the past decade,” he said.
Christie, 48, a first-term Republican, said he sees opportunity in Illinois because of Governor Pat Quinn’s decision to increase the income tax to 5 percent from 3 percent and corporate taxes to 7 percent from 4.8 percent.
Sun Bancorp Inc., based in Vineland, New Jersey, sees “some slight signs of stabilization in the economic outlook for New Jersey as a whole,” Chief Executive Officer Thomas X. Geisel said on a Jan. 26 conference call. “The evidence of a slow economy surrounds us still as we enter 2011.”
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