Thinking about buying a house? Or a municipal bond? Be careful where you put your capital. Don’t put it in a state at high risk of a fiscal tailspin.
Eleven states make our list of danger spots for investors. They can look forward to a rising tax burden, deteriorating state finances and an exodus of employers. The list includes California, New York, Illinois and Ohio, along with some smaller states like New Mexico and Hawaii.
If your career takes you to Los Angeles or Chicago, don’t buy a house. Rent.
If you have money in municipal bonds, clean up the portfolio. Sell holdings from the sick states and reinvest where you’re less likely to get clipped. Nebraska and Virginia are unlikely to give their bondholders a Greek haircut. California and New York are comparatively risky.
Two factors determine whether a state makes this elite list of fiscal hellholes. The first is whether it has more takers than makers. A taker is someone who draws money from the government, as an employee, pensioner or welfare recipient. A maker is someone gainfully employed in the private sector.
Let us give those takers the benefit of our sympathy and assume that every single one of them is a deserving soul. This person is either genuinely needy or a dedicated public servant or the recipient of a well-earned pension.
But what happens when these needy types outnumber the providers? Taxes get too high. Prosperous citizens decamp. Employers decamp. That just makes matters worse for the taxpayers left behind.
Let’s say you are a software entrepreneur with 100 on your payroll. If you stay in San Francisco, your crew will support 139 takers. In Texas, they would support only 82. Austin looks very attractive.
Ranked on the taker/maker ratio, our 11 death spiral states range from New Mexico, with 1.53 takers for every maker, down to Ohio, with a 1-to-1 ratio.
I was curious to know which states were among the 11, and how many voted for Obama. All seven mentioned above were Obama’s but the four not mentioned—Alabama, Kentucky, Mississippi, South Carolina—went for Romney. There may be reasons why those four are on the list (that they’re all Southern may be a clue). A state as wealthy as California clearly chose this path; a state as poor as Mississippi probably never had have such a choice. But not to mention them at all seems a tad dishonest.
Still the point is a good one. Politics has something to do with it, but economics matters more. We may all be Americans, but we’re not all family. Take care of yours.