Rick Santelli on the War Between the States−Tax Too Much and People Will Leave

Texas and North Dakota winning the war by creating the environment for jobs and prosperity

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Rick Santelli

Show transcript of Rick Santelli on the War Between the States−Tax Too Much and People Will Leave

JIM: Joining me on the program is Rick Santelli. Rick is the CNBC business news network editor at the Chicago Board of Trade.

And Rick, I want to talk about something you and I share in common and that is we both live in states that are going broke. You live in Illinois; I live in California. Let’s begin with that because a lot of attention has been focused on the national debt ceiling -- in fact, I’ve got the national debt clock on my computer screen right now, we’re roughly at about almost 15.8 trillion now. But let’s talk about this because what your state is doing and what my state is doing -- we’re losing revenues, we’re spending more money and yet the governor is coming back; we want to add another dollar to a pack of cigarettes and cigars; we want to raise the tax rates from 10.3 to 13.3. Instead of putting them on millionaires it’s going to start at 250. We want to raise the sales tax. 

And Rick, I’ve been following every month the state controller’s office report on our fiscal deficits; our income tax revenues are down, our sales tax revenues are down, our corporate tax revenues are down and they’ve been falling every year for the last couple of years. [1:54]

RICK: Yeah, Jim, as you outlined it, you even made me more depressed than I was. And I already, today, on air, about 20 minutes ago, did my second piece on California and I concentrated on many of the issues that you just brought up. I mean the notion that in January Governor Brown thought he’d have around a $9 billion deficit, now it’s up closer to 16 and many experts think it’s going to be closer to 17 to 18 billion. And you brought up all the salient points that Governor Quinn and Governor Brown don’t get, but governors like Mary Fallin in Oklahoma certainly get. She’s trying to get rid of her state income tax because she is wedged in to states like Texas that are doing so well and they obviously don’t have a state income tax, but what they do have is a significantly low unemployment rate. So we could summarize: Governor Brown, Governor Quinn taxing people; they’re on wheels, they’re going to leave, but the people who are coming into the State are jumping disproportionately into entitlement programs. This is a losing equation no matter how you slice it. 

But I think the biggest travesty is the spending. Here we have California, if you look at ’07-’08 right before the crash because let’s put that as the high-water line of spending for California, well, the current budget proposed should all these referendums pass, they’d be spending about 15 percent more than they did in ’08. That doesn't sound like fiscal management with a bit of austerity to me. [3:17]

JIM: What I don’t understand and we have a lot of smart people in this country; the governor of Oklahoma, Chris Christie in New Jersey, you know, California -- the Wall Street Journal did an article that was done by a professor here, and he’s talking about when Apple built a new factory, they’re building it in Austin, Texas; you’ve got EBay moving to Austin, Texas. And there are four states right now, Rick, Oklahoma being one of them, that are trying to get rid of their income tax because they’re saying, gosh, North Dakota has got an unemployment rate of 3 percent, jobs are being created in Texas, businesses are moving there. And let’s face it, it’s businesses that really create the jobs and the wealth in this country. Why do you think they don’t get this? You’d think year after year when they see revenues down -- They come back with the same thing: we’re going to spend more money and raise more taxes. [4:06]

RICK: It makes no sense and you pointed to Oklahoma. I spent some time in Oklahoma, I did a conversion of an F150 truck so it would not only run as it did off the assembly line on regular unleaded gasoline, but it also when we were done with it, it ran on natural gas, so it was bi-fuel car; it could run on either. The reason I bring it up is one of the commonalities of many of the states that you have mentioned that have low unemployment and thriving job scenarios is not only the fact that they have their tax structure either going down or eliminated state income taxes completely or in the process thereof, but they have a boom going on in jobs creating more energy, more domestic energy like natural gas. And many would say, well, it’s all fungible; we throw it in the world market, is it really going to make a difference? Yes. Do you want to know why? We’d rather use domestic fuel. And even if natural gas was the same price, and believe me, it’s far cheaper right now than any of the fuels that are running our cars, but even if it was the same, the choice between domestic or Middle East to me is a lay-up choice. I think if we label natural gas as domestic fuel people would understand. 

So yes, there are two fronts that I think these governors are missing and the first is, as we pointed out, the Art Laffer notion that if you tax people too much they will leave, A; and B, the government, whether it’s states or the federal government predominantly, we are fighting the energy battle and the job battle with one hand tied behind our backs. Why we penalize ourselves to cheaper energy, when we all know energy is what makes the economy go round. [5:39]

JIM: It’s absolutely amazing because in our state we know that we have 20 billion barrels of oil reserves off Santa Barbara, but you can’t touch it. We know that we have mining-rich resources in Northern California; you can’t mine it. And our local utility had to go down to Mexico to build a power plant. But everybody in California -- we have more cars than any other state in the union. So these people are still driving, they’re still putting gasoline in their tanks and they’re still flipping the light switches on in their homes. It’s insane. [6:11]

RICK: And it’s disingenuous as well, Jim. Consider this: we all know that California wants to respect their environment, and believe me, I get that, but when you think how little pollution comes from the tailpipe on natural gas, it’s cleaner than any of the standards that are being put forth either now or 15 years hence forward through time, but even more, Californians like to drive. My daughter lives there, okay. They don’t use public transportation. And there are many bills where they’re trying to build some public transportation and most of the studies prove pretty clearly that it’s going to be a cost loss and of course that will have to be another expense either picked up by the state or shared by the federal government. So none of it makes sense. I am still not understanding why Americans, and Californians in particular, cannot understand that an internal combustion engine has been around for more than a century, it’s proved to be a great boon for humanity, if we could make it efficient to run on a clean source like natural gas, which with fracking we have plenty of, not even to mention all these barrels of reserves that some of these new studies have shown are going throughout the country, California included, Alaska, even the Midwest, why don’t we go after the number of jobs that this particular energy industry can create. 

As you pointed out, North Dakota, Wyoming, these are the poster children for the resurgence not only in energy jobs, but leading to manufacturing jobs as well is the costs in the likes of China and Vietnam on the labor side have now started to hit an equilibrium with respect to any benefits that are exported to the US. [7:47]

JIM: I want to move on to and carry this theme on to the national level. There is a big debate going on in this country in this political campaign that somehow somebody like a guy that worked in private equity, that created wealth, created jobs; you and I know, Rick, that if a company is losing money there’s two things that are going to happen, either, one, it’s going to be restructured or number two, it’s going to go under. And we have this mentality that is developing here that we can’t let capitalism work. If somehow if a company is big enough [or] it’s connected big enough with you know, maybe the president or somebody in Congress, if they’re failing, we need to prop up failure and then we need to go after those people that are successful. And a prime example is the Buffet rule because to me that’s a tax on capitalism; people who earn a living off dividends, interest or something like that or capital gains, that’s taxing capitalism. And I don’t think it works, do you? [8:50]

RICK: Well, I think our analogies of the states that have gotten rid of their state income tax or are in the process of, and how their revenues -- you know, in Oklahoma, as they keep lowering their state income tax, with Mary Fallin hopefully bring it down to zero and getting rid of it, they find the revenues keep going up. So yes, I don’t understand why this dynamic isn’t so obvious to everyone. But even take it a step farther, when it comes to the national picture, just look at the current issues with the president and his people regarding bank capital. 

Listen. Private equity has some winners and some losers. The very notion that we are now trying to deconstruct capitalism and point to areas where, for example, some of these failures some of the investors ended up better off after they put their money into a company or a steel company, just doesn't make any sense. And I’ll give you a great analogy with the government; it has the same problem. 

When they bailed out GM versus going through a traditional bankruptcy, which would have been my preference, if you look at the number of employees before and after the bailout, look at how many jobs have sprouted up in Europe -- and believe me, I don’t see anything wrong with that, that’s the way business needs to operate -- but if you look at the stencil of how GM has developed and then you compare it to some of the issues that the current political class are going after the likes of Bain Capital, there’s a lot of similarities. So yes, it doesn't make sense. 

And what’s worse is when you think about the government you think about profitability never entering into the equation; when a company, as you pointed out, doesn't make money it folds and it’s gone. 

But yes, we still have 49 federal programs for job training. Okay. At a cost of almost $15 billion; only four of those 49 programs have been stress tested to find some proof as to whether they’re actually adding anything into the jobs training arena. And the marks were poor on those four or five that were rated and there’s still 44 of them that haven't been graded at all. So the notion that if you try to cut something that we're spending $15 billion on; what happens? The political class screams, “well, there is no way to get out of this quote unquote recession or this economic malaise without these programs.” 

So there is never a cost-benefit analysis done on the government side which is inherent in capitalism: Failure. Failure is the only regulation, it is the only rule. It’s what makes capitalism great. Otherwise, you end like Greece or you end up like Spain where you end up with a labor force that you can’t fire. So what happens when times get tough, Jim? None of these companies want to hire because when you hire, even part-time workers, you’re given so long, you can’t get rid of them, you have to make them full-time. So we are moving more to that model. And yet every day in the newspapers you read how the European model is definitely going the way of the Dodo bird. [11:33]

JIM: Do you think we could see eventually sort of a bifurcated economy in the United States where you see, let’s say states like Oklahoma, Texas, North Dakota, Nevada, states that are going in the opposite direction and say, you know what, when companies come here, they build a plant, they hire workers, those workers spend money, we get sales tax revenue, we get property tax revenue, we create a better economy and standard of living for everybody versus let’s say the California, Washington DC model. Because it seems like -- you may know this, but there are four states right now that are working on getting rid of their income tax because they see the progress in the prosperity that they’re seeing in states like Texas and North Dakota and saying, we want some of that. So is it possible that we’ll end up having two Americas? [12:24]

RICK: I think so, but I think the America we're talking about on the California kind of Illinois side are going to continue to slip -- Michigan. You know, this isn’t going to sound all that humane, but let’s take a step back and look at things in a more calculated fashion. If you look at the states that have historically had the biggest entitlement programs, the biggest benefit of federal spending into a system, you look at states like Michigan. They are poster children for how none of this has worked. They’ve been the recipient of more programs to help the poor, to retrain, to try to take industries like auto industries as they were moving out or going out of business or relocating and trying to replace that; what we find is throwing money at it doesn't do the job. So yes, what we see is that you have to experience a little pain. 

And my analogy here would be Wisconsin. It looks as though Mr. Walker is going to win it, at least based on current polls for the recall that’s coming up in a couple of weeks. And Wisconsin is going through this metamorphosis; they are trying to get their underfunded pensions under control, they’re trying to do all the things that Illinois and Canada have refused to do. 

So my answer is yes, but that split call is going to be so skewed that I think that the states that are on the left side of this like Illinois, like California, they’re have to go hat in hand to the federal government. And depending what happens in the November elections, hopefully the federal government will say “don’t come to us for any assistance, get your own house in control.” 

So I think three-to-five years down the road, depending on how fiscal conservatives maybe infiltrate more of the Senate, hold on to the House, I do think that these states are going to be forced to try to get some of this spending under control and for once, kind of blow away this theory about the baseline: Don’t tell me that you’re spending less, when really we're only talking about the rate of increase spending getting smaller. [14:19]

JIM: A final question, Rick. I know you started out your career on the Chicago Mercantile Exchange; originally I think you were working gold, lumber, T-bills. How would you compare the exchange, the way it functions and the market today compared to when you got in the business? [14:35]

RICK: Well, of course, computers, when I got in the business in ’79, were just coming into kind of their stride. And I remember in 1980 I bought a TRS-80 Tandy computer. It was basically a giant calculator with a little dot printer. And the combination of those two cost me $1100 and when I walked on the trading floor -- I did a basic program to do some of the T-bill spreads I was trading -- the security guards wouldn't let me on the floor. It was against the rules at that time to bring a computer on the floor. So how times have changed. 

I think the computer has changed the industry in many ways that are good, but in some ways that aren’t as good. And the negative side is I think humans bring a lot to any equation, as we learned by the NASDAQ’s issues with that record size IPO of Facebook. They didn’t get confirmations; customers didn’t get their electronic orders confirmed. It was really a nightmare. People in the equation is a good thing.

And the second area that I haven't been totally pleased about is many of the exchanges have gone from being non-profits, they IPOed and became shareholder entities. In my opinion, I don’t know that that’s a really good thing and I’ll tell you why. I think the exchanges now have shareholders to answer to, so they become another corporation that lives quarter to quarter. I think when they were non-profits they had a longer strategic view, and I think they did things more to benefit members, which in my opinion benefited investors. [16:02]

JIM: Well spoken. Well, listen Rick, I know you have a busy schedule. I want to thank you for joining us on the Financial Sense Newshour. 

Once again, we've been speaking with Rick Santelli. And Rick, let’s just keep our fingers crossed and maybe more light bulbs are going to start going on with governors across this country. [16:18]

RICK: Well, if the light bulbs don’t start going on, they’re going to have to turn the lights off. So yes. I think they’re going to arrive at the only conclusion that makes financial sense. [16:26]

JIM: All right. Take care, Rick. Thanks.

RICK: Thank you, Jim. [16:29]

Jim is pleased to welcome back CNBC’s Rick Santelli to discuss how many large states such as California and Illinois are increasing both deficit-spending and taxes, driving out job creators to more business and tax-friendly states. Rick notes that if the light bulbs don’t come on soon for many state legislatures, the lights of commerce will continue to go off, or move to a more welcoming state.

Rick joined CNBC Business News as on-air editor in June 1999, reporting live from the floor of the Chicago Board of Trade. His focus is primarily on interest rates, foreign exchange, and the Federal Reserve.

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About James J Puplava CFP