For the sixth consecutive year, Utah’s economic outlook earned the top ranking in America, according to “Rich States, Poor States: ALEC-Laffer Economic Competitiveness Index.”
Like past editions, the report compiles and updates the results from the 50 state “laboratories of democracy,” and provides a clear account of how the nation’s top performing state economies have achieved impressive levels of economic growth. It is clear that limited regulation, low taxes, low debt, pension reform, a predictable tax climate, and balanced budgets all contribute to the success of America’s top-rated states.
One conclusion from these findings in Rich States, Poor States stands out. In general, states that value limited government and low taxes, particularly on productive activities such as working or investing, experience more growth than states that tax and spend more. Increasingly we are witnessing this economic “Balkanization” effect between states.
No Income Tax vs. Income Tax
One of the great, understated facts is that states do not enact policy changes in a vacuum. When a state changes policy, for better or worse, it immediately affects the incentive structure for individuals and businesses alike — and the change in incentives has a direct effect on the state’s competitiveness. In fact, over a 10-year period, the nine states without personal income taxes on wages have outperformed the nine states with the highest income taxes in growth in population, jobs and revenue. (see table 5 from book)
The stakes are high: More than $2 trillion in wealth has moved from one state to another in the past 15 years alone. Additionally, during that same time, 43 million Americans “voted with their feet” and moved across state lines for new opportunities.
Both investment and human capital are more mobile than ever. For instance, the nine states without personal income taxes have, on net, gained 2.9 million new residents from other states over the past decade. On the other hand, the nine states with the highest income tax rates have, on net, lost more than 3.8 million persons during that time. Americans continue to move toward more economic opportunity — and that opportunity continues to be greater in the states where economic policy is most competitive.
State lawmakers working to emulate Utah, North Dakota, South Dakota, Wyoming, and Virginia (the top five states in this year’s economic outlook index), and diverge from Minnesota, California, Illinois, New York and Vermont (the bottom five states in this year’s economic outlook index), should look to embrace the free market, low tax, limited government principles described in Rich States, Poor States.
Income Tax Especially Damaging
Making sure income tax rates remain low is a centerpiece of sound tax and fiscal policy. As described above, the movement between the no income tax states and the highest income tax states is astounding. The research done by Rich States, Poor States and other professional observers of economic policy leads to the conclusion that personal and business income taxes are the most harmful to economic growth. Of course, all taxes affect economic growth, but it is worth noting that income taxes are the worst offenders when it comes to slowing this growth.
Rich States, Poor States was created to provide every state legislator the tools to benchmark their state’s policy environment. We hope lawmakers from across America will examine the economic success from states that value economic freedom and competitiveness.
For the well-being of the other states, we hope more elected officials will work to emulate the successful approach to policymaking found in states like Utah, Wyoming and Texas — and avoid the numerous mistakes being made by government officials in California, Illinois and New York. It is the essence of the American experiment with federalism that each state is allowed to shape its own economic destiny.
Jonathan Williams is Director of the Center for State Fiscal Reform at the American Legislative Exchange Council (ALEC) and is a co-author of Rich States, Poor States. The report is available for a free download at www.alec.org/rsps. “Like” Rich States, Poor States on Facebook and follow on Twitter @ ALEC_Tax and @ALEC_States