Examiner Local Editorial: A Tale of Two States

Examiner Editorial:  A Tale of Two States

Maryland Gov. Martin O’Malley, a liberal Democrat, and Virginia Gov. Bob McDonnell, a conservative Republican, are both young and telegenic, chairmen of their respective political parties’ national governors associations, and already in line for higher office. Both also govern states that benefit disproportionately from the ever-increasing size and scope of the federal government. But McDonnell’s state is on the upswing, while the major economic indicators in O’Malley’s state are heading in the wrong direction, and nowhere is that more evident than the latest unemployment figures.

As The Examiner’s Brian Hughes reported last week, Virginia’s 5.6 percent unemployment rate is the lowest in more than three years and the lowest in the entire Southeast. The Old Dominion added 32,200 jobs last month and was one of 29 states reporting positive job growth. It was a different story in Maryland, where about 1,000 jobs were lost in March and unemployment rose from 6.5 to 6.6 percent.

The underlying reason for these divergent trajectories is explained in “Rich States, Poor States,” a study by Arthur B. Laffer, Stephen Moore and Jonathan Williams and released by the American Legislative Exchange Council (ALEC — yes, that ALEC). Even though Maryland’s personal per capita income is higher, Virginia has a much brighter economic future, ranking third in the nation for economic outlook, compared to 20th place for Maryland.

This did not happen by accident. Virginia has significantly lower personal and corporate tax rates than Maryland, which is one reason Virginia gained a net 107,135 residents through interstate migration between 2001 and 2010, even as Maryland lost 95,645. Among those fleeing the Free State were wealthy taxpayers who had been targeted by O’Malley’s “millionaire’s tax.” That tax was scrapped only after it helped cause the state to lose one-third of its million-dollar earners and more revenue than it had expected to gain, a phenomenon described by the Laffer Curve: “At some point, higher tax rates become counterproductive.”

The biggest difference between the two states is their vastly different philosophies regarding unions and death taxes. Virginia leads the nation with its strong right-to-work law, which encourages entrepreneurs to start companies without worrying about union demands. In 2006, the Virginia General Assembly and Democratic Gov. Tim Kaine also eliminated estate taxes so successful small-business owners could keep more of the wealth they accumulate within their families. Maryland is ranked dead last in both categories.

Tax and labor policy are destiny. This is why Virginia was ranked 8th in economic performance over the past decade, with Maryland trailing far behind in 21st place. It’s also why Virginia, not Maryland, is currently in the top three for future economic growth.

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