Bloomberg Has It Right, States & Cities Should Compete For Talent

"You know, the yelling and screaming about the rich - we want rich from around this country to move here. We love the rich people."

- New York City Mayor Mike Bloomberg speaking Friday

Bloomberg has it right by refusing to play into the populist uprising against families making more than $250,000 per year.   As Mayor of a city that relies heavily on the financial sector and the wealthy (1 in every 5 income tax dollars New York City takes in comes from finance), billionaire Bloomberg understands the devastating monetary impact an exodus of these families would have on his city.    As his own state of New York likely turns a deaf ear, other states should follow his example and look to lure in the high earners with incentives.

It should be a buyers market for states looking to change their long-term prospects.    The smart ones will recognize this and

Little can be done to stop the tax increases federally.    The Obama administration is determined use the Clinton-era economic story to raise taxes on the wealthy, capitalizing on the national memory of the mid-1990's as "good times" and a balanced national budget (failing to remind America that much of those "good times" came from the tech stock bubble, taxes paid on phantom stock gains and, of course, no major terrorist attack and subsequent wars).   The story is also being sold that these are not new tax hikes, but merely a return to taxes on the wealthy back to pre-Bush levels, and that these cuts benefited the rich more than any other income level.    Of course they did.   The same percentage of a larger number is a greater absolute figure than that of a smaller one.   Sadly, this concept is easily manipulated for political gain.    If all income levels receive a 3% tax cut, it would be easy - and true - for a politician to scream about how a wealth family "benefited 10 times more than a middle class one" (3% saving on $40,000 is $1,200, while a 3% saving on $500,000 is $15,000 ... more than ten times the "benefit" on a dollar basis, even as the actual percentage reduction is equal).

Unfortunately, the message of how the wealthy "unfairly" benefit distorts the facts on how much society and the lower wage earners also gain.  As the non-partisan Congressional Budget Office data below indicates, lowering tax rates on the wealthy increased the total tax burden on higher earners and lowered it on lower income earners.

Bloomberg's comments yesterday show he understands that going after the high-earners will not only impact vital tax and sales revenues, but likely end up hurting the poor by placing more of a tax burden back on them as the wealthy retreat from spending to save up for the incoming tax hits.

A bigger question may be: how much wealth is going to be left to tax?     The map below shows the highest per capita income concentrations in America as of 2005:

Let's analyze a few areas above...

Detroit: Still a few packs of old money families roving around Grosse Pointe, but fewer by the week and we know what's happened to the American auto industry.

New York Metro: Wealth is primarily built from finance, and as Bloomberg added yesterday, "we can tax the rich, except that, if you haven't looked at the stock market lately, they aren't making any money."  Bonuses are down 44% and more than half of all finance jobs have been lost.   It is going to be a very, very difficult few years for New York City.

California's Silicon Valley: Generally sees its wealth created by stock options and the ultimate payoff when and if the underlying companies make it big or are purchased by a larger competitor.   Not only are fewer new companies being created, but the potential buyers of those companies are seeing their own stock and capital base shrink.

Dallas: Oil revenues are sinking as the price of crude collapses.

Miami/Palm Beach: Triple hit from the real estate collapse, decline in emerging markets (where many of its migratory Latin American residents get their wealth) and scams like Madoff.

Only the Washington, D.C. area seems immune as the government expands.

As the more traditional industries of wealth dry up, smart states should take advantage of the current scenario to boost their long-term prospects by encouraging out-of-work or disgruntled entrepreneurs, inventors and professionals to come to their states and create new ideas and companies.   They can do this by offering incentives such as tax breaks on properties and income taxes.  Utah, which has a fixed state income tax rate of 5%, has two of the three fastest job growth cities in America according to the Milken Institute.

Mike Bloomberg is a very smart fellow (fair disclosure: I worked at his eponymous firm Bloomberg LP for 12 years and knew Mike before he went on to run the city of New York) and a self-made guy.   He's rich now, but he became rich by starting his company from scratch after being fired by investment bank Salomon Brothers (read the book "Bloomberg by Bloomberg" if you get a chance).  In some ways he embodies the exact type of scenario he is trying - against nearly all political odds - to sell: give smart, talented people the incentive and motivation to create something and you often won't be disappointed.  The more incentives you remove, the less you are likely to get.

Consider a scenario in the Presidents own backyard.    Virginia has many of the richest counties in America and is one of only 19 states with a median income above $50,000.   Its close neighbor, West Virginia, has the 2nd lowest median income in the United States behind Mississippi.  Even still, Virginia has a lower state income tax rate.   West Virginia would be smart to make itself "almost heaven" for hard workers and high earners by slashing state income tax rates or eliminating it altogether.   What it would lose in short-term income tax revenue would be balanced out by the spending of the influx of former Virginians on everything from homes, to furniture to food.   One can already hear the Mayflower moving trucks rolling up the 20 miles from Route 15 from Leesburg, Virginia to Harpers Ferry.