News - Bill's Blog

Prediction vs. management: Uncle Sam and Mother Nature

June 22, 2021

A consumer financial services company recently released a report with projections of individual lifetime tax payments across the 50 states. The study relied on national spending averages coupled with current state-specific taxes, and projected future taxes across the 50 states based on estimates of lifetime expectancy. The study ranked the states on estimates of the share of lifetime earnings to be paid in taxes, including federal as well as state and local taxes.

This study’s methodology may deserve a closer look, but here’s one question it sparked: How should future taxation trends be treated, if not projected, in a study like this? Should tax structures and rates simply be assumed to stay the same, and where they are today? Or should projections like this try to anticipate whether some states may be more likely than others to change their tax policies in the future?

We all have to try to look forward while planning our financial futures, including how our governments matter for that future. But in this regard, I’m reminded of some of the challenges that arise in sailboat racing. Sailors try to manage and anticipate changing wind speeds and directions, in an arena where the wind is invisible, and hard to predict. And flawed predictions can have consequences.

State government financial conditions depend, today, on how any given state may have been kicking the can down the road or not in the past. Some states have been more prone to spending beyond their current means, in light of the expenses they have incurred and the future promises (like pensions) they have distributed. 

Many states (and cities) have effectively “undertaxed” their taxpayers. State government representatives greased the wheels for distributing (and redistributing) wealth in the short-run and accumulated debt with consequences for future taxpayers. This concern matters, no matter how one feels about the appropriate size and scope of government. The results have implications for tax policies going forward and can vary across the 50 states.

That’s why it makes sense to compare state and local governments with a blended set of indicators. WalletHub’s “Tax Burden” measure relies on current tax payments and their share of current personal income, for example, while Truth in Accounting’s “Taxpayer Burden” measure helps to capture the depth of current financial stress bearing consequences for taxpayers down the road.

Another factor has arisen to make life more exciting for anyone in the financial projections business, especially projections relating to state and local government tax policies. That is the federal government’s response to the pandemic/lockdown/economic crisis of 2020. 

For state and local governments, Uncle Sam is always in the background. Sometimes he is especially willing to distribute (and redistribute) wealth nationally, with varying consequences for different places, including those that have been responsibly managed and those that haven’t. 

On this score, consider how dramatically states can differ with respect to OPEB, primarily the liabilities arising from state and local governments have promised for retiree medical care benefits. Could a future "Medicare for All" benefit some states at the expense of others?

Today, bailouts may have encouraged less-than-financially responsible states and cities to delay their internal day of reckoning. But no matter which state we live in, we share a common stake in the pot managed by Uncle Sam.  

On that score, we aren’t really in the world of sailboat racing, at least in one respect. Government may be difficult to predict, like Mother Nature. But as citizens and taxpayers, we can (and should) do our best to manage how our representatives set the table for the policy environment. We don’t have to keep seeding financial storms as we have in the past.

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