Politics & Policy

Business-Friendly States Are Growing at the Expense of Those that Tax and Spend

Utah State Capitol and downtown Salt Lake City (Photo: Photoquest/Dreamstime)
The tenth annual Rich State, Poor State rankings show just how far low taxes and reduced regulation can carry a state.

The tenth edition of the Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index has just been released, and once again, Utah was found to have the best economic outlook of any state in the nation. The rankings are based on 15 equally-weighted economic policy variables, including tax rates, labor policy, and regulatory climate. They continue to show that states valuing economic freedom and competitiveness outperform states adhering to the tax-and-spend model, with state economic policies having a substantial effect on where businesses and individuals choose to set up shop.

Taxes matter for economic competitiveness. People and businesses often seek out lower tax burdens across state lines. Rich States, Poor States data shows states that keep taxes low, avoid job-killing over-regulation, and follow prudent budget practices consistently and significantly outperform their highly taxed, over-regulated counterparts. Shown below are the top- and bottom-ten states in terms of economic outlook for 2017. Over the past decade, two states have made the top ten in the rankings every single year: Utah and Wyoming. In fact, after enacting tax cuts, a flat tax, and pension reforms, Utah has earned the top spot in all ten editions of Rich States, Poor States — a truly impressive accomplishment. On the other side of the spectrum, New York and Vermont have managed to land in the bottom ten each of the past ten years.

This year, several states earned their best all time rankings in Rich States, Poor States. After enacting right-to-work legislation and aggressively cutting tax rates, Indiana, which sat at 24th as recently as 2012, claimed the second-best economic outlook in the nation this year. Texas and New Hampshire both also saw significant improvement in the 2017 rankings, earning their best marks to date.

By examining state-by-state migration trends, it is easy to see which states are enacting pro-growth policies. After all, Americans have shown that they are willing to “vote with their feet” for better economic opportunities even if it means leaving their home state. The top-ten states in the 2017 rankings have gained more than 3.75 million residents in the past decade. The bottom-ten states, meanwhile, have lost more than 3.78 million residents over the same period. In addition to experiencing a mass exodus of residents, states with oppressively high tax rates such as New York, Illinois, and California have lost vast economic opportunities and vast amounts of wealth. Job growth over the last ten years was nearly three times higher in the top ten states than it was in the bottom ten.

When state governments enact bad policy, individuals and corporations react rationally, working less, investing less, or moving to a more business-friendly state altogether. Growth-oriented states routinely prioritize core services in their budgets while minimizing the tax burden on residents. Poorly ranked states in the Index consistently stifle growth with higher taxes and increased regulation.

Of course, tax and fiscal policies are not the only predictors of economic growth. Demographics, climate, natural resources, and other geographic amenities remain important factors in state economic growth as well. But even adjusting for these other factors, states that embrace sound economic policies vastly outperform those that don’t. Coastal California may enjoy a better climate in its ten-day forecast than Texas for much of the year, but economic growth and migration patterns strongly suggest that the Lone Star State has a brighter future than the Golden State.

While free markets and low taxes enable resources to flow in a productive manner to meet the demands of consumers, markets distorted by government through cronyism, taxes, and regulation create lower output and stifle investment. In Rich States, Poor States, the 50 “laboratories of democracy” give us clear examples of this every year. Freedom works, and the Index proves it.

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