Report: Less-Taxed-and-Regulated Metro Areas Have ‘More Prosperous Economies’

Published March 17, 2019

U.S. metro areas less burdened with taxes and regulations “tend to have higher per capita incomes and faster population growth,” a new report states.

The “U.S. Metropolitan Area Economic Freedom Index” used measures of state and local government policies that affect the economy to produce an overall score for each of the nation’s 382 MSAs.

The Reason Foundation report by Dean Stansel of the O’Neil Center at Southern Methodist University and a policy advisor to The Heartland Institute, which publishes Budget & Tax News, was released on January 31.

“Metro areas with higher economic freedom tend to have more prosperous economies,” said Stansel.

Best and Worst

The index separately ranks the 52 largest Metropolitan Statistical Areas (MSAs) with populations over one million, and the 330 smaller MSAs.

The nation’s five highest-rated large metro areas on economic freedom are, in order, Houston, Texas; Jacksonville, Florida; Tampa, Florida; Richmond, Virgina; and Dallas-Fort Worth, Texas. The lowest-ranked, in descending order, are Riverside, California; Rochester,  New York; Buffalo, New York; New York, New York; and Cleveland, Ohio.

The top three smaller metro areas in Reason’s index are Naples, Forida, Midland, Texas, and Sebastian-Vero Beach, Florida. At the other end of the rankings are the bottom three metro areas: El Centro, California, Kingston, New York, and Visalia-Porterville, California.

States Influence Ratings

There is considerable variation in the economic freedom of U.S. cities, even within the same state, the report shows.

The San Jose MSA, for example, scores much higher in economic freedom than the Los Angeles MSA. In Tennessee, Nashville’s MSA far outshines metropolitan Memphis.

The Golden State’s top performer, the San Jose MSA, still finishes lower than Florida’s worst performer, Panama City.

Florida emerges as the state with cities having the most economic freedom overall. In 35 states, the economically freest area has less freedom than Panama City, Florida’s lowest-rated metro area.

Freedom As Income Booster

Greater economic freedom is associated with faster population growth, says Stansel.

“In the freest quartile [25 percent of MSAs], population grew 4.8 percent in the most recent four years, compared to only 1.2 percent in the least-free quartile,” said Stansel.

“The slower population growth there also creates a more stagnant economy with fewer economic opportunities for all,” Stansel said.

Greater economic freedom is also associated with higher incomes, Stansel says.

“Per capita income was 5.7 percent above the MSA average in those freest areas, but 4.9 percent below average in the least-free areas,” said Stansel. “Living in one of the least-free areas amounts to taking an 11 percent pay cut compared to living in one of the most-free areas.”

Using Subsidies to Compensate

The report shows cities with slower economic growth tend to react by subsidizing some business investments, says Adam Michel, a senior policy analyst with The Heritage Foundation’s Center for Economic Freedom.

“The New York metro area won half of the new Amazon headquarters with large subsidies to compensate for its fourth-to-last standing in the Reason freedom rankings,” said Michel. Amazon subsequently decided not to locate in New York City, after numerous protests from politicians and activist groups.

“New York’s high tax rates and burdensome regulations are not easily compensated for, and when they do try to compensate, they have to hand out politically motivated subsidies,” Michel said.

Businesses are realizing they can’t rely on deals with government, which are undependable in comparison with broadly applied government policies, says Michel.

“The precarious nature of government central planning exploded as Amazon couldn’t rely on the deals it had cut to last long enough to make any meaningful investments,” Michel said. “The Amazon example shows that companies and individuals are realizing that broadly applied low taxes and sensible regulations are good for everyone.”

Spending, Taxes, Regulation

The index is based on measures of government spending, taxation, and labor market regulation. Spending as a percentage of personal income is measured by government purchases of goods and services, employee benefits and pensions, income transfers, and business subsidies.

Taxation is measured by government revenue as a percentage of personal income from taxes on income and payrolls, sales, and property.

Labor market measures are the full-time minimum wage as a percentage of income per person, the percentage of workers employed by the government, and the percentage of all workers who are unionized.

Bonner R. Cohen, Ph.D. ([email protected]) is a senior fellow at the National Center for Public Policy Research.

Internet Info

Dean Stansel, “U.S. Metropolitan Area Economic Freedom Index,” Reason Foundation, January 31, 2019: