This commentary originally appeared in Real Clear Policy on February 9, 2016.
Economic freedom in America has steadily declined for the past 15 years as the role of the federal government has expanded rapidly. However, the situation is worse in some states than in others — as noted in the latest “Economic Freedom of North America” (EFNA) report, of which one of us is a coauthor.
The most economically free states have per capita incomes 7 percent above the national average; the least free states have income 8 percent below the average. The contrasts are especially clear among the four largest states, which account for over one-third of the U.S. population.
New York and California are ranked last and next to last in economic freedom, respectively, while Texas and Florida are tied for third (behind only sparsely populated New Hampshire and South Dakota). Their economic performances also stand in sharp contrast. In recent years, population has grown twice as fast in Texas and Florida as it has in New York and California. Employment and income have grown faster in Texas and Florida as well. Levels of income inequality have remained about the same in Texas and Florida, despite their having far fewer costly redistributionary policies.
This is not a new phenomenon. Historical data in this year’s report shows that Texas and Florida have been in the top five for economic freedom since 2005, and in the top eight since 1981 (when the data set starts). New York has never ranked higher than 48th, and California has been above 40th only twice, both times ranking 39th.
It’s no coincidence that Texas and Florida have thrived while New York and California have not. High levels of taxes, spending, and regulations make it more difficult for entrepreneurs to be successful. When entrepreneurs cannot expand their businesses and hire new workers, everyone is hurt, not just the rich.
There have been over 130 papers by independent researchers using the EFNA index. The vast majority of those have found that higher economic freedom is associated with a host of positive outcomes, for example higher incomes, faster income growth, and more entrepreneurial activity. Similar research has been done using country-level data with the same basic conclusion: Countries with more economic freedom tend to have more prosperous economies.
Texans have reason to be pleased, but as was once said, “The price of liberty is eternal vigilance.” While the state ranks near the top of the EFNA list by having a relatively limited-government philosophy, there’s plenty of room for improvement.
Being one of only nine states without an individual income tax substantially benefits Texans and must be maintained. However, Texas is one of only four states to impose the terribly burdensome business margin tax, which is similar to a gross-receipts tax. As a result, the Tax Foundation ranks Texas as 41st nationwide on corporate taxes in their State Business Tax Climate Index. Texas also ranks quite poorly for sales taxes and property taxes (37th for each) in the EFNA report. Restraining government spending so that these taxes can be reduced would help Texas be even more competitive with other states.
Taxpayer-funded corporate subsidies also limit Texas’ full potential. The Texas Economic Development Act is a property-tax abatement initiative of $1.6 billion over ten years that reduces tax liability and provides tax credits for companies that build facilities and create new jobs. The breadth of these programs is expansive, including the Texas Enterprise Fund, the Economic Development Bank, Arts Organization Grants, and others. Texas taxpayers would be wealthier if less money was spent on these initiatives, which often provide big giveaways to huge corporations while leaving small businesses to fend for themselves — corporate welfare at its worst.
Finally, in the Mercatus Center’s “Freedom in the 50 States” report, Texas ranks only 24th for regulatory freedom. One reason is stringent occupational-licensing requirements; the Institute of Justice ranks Texas as having the 17th most burdensome set of them. These regulations protect existing businesses from new competition, and they make it harder for low-skilled workers to find employment. They should be dramatically scaled back.
Texas’ successful economic model is one that other states and federal lawmakers would be wise to follow. But even Texas could do far better.
Dean Stansel is a research associate professor at the O’Neil Center for Global Markets and Freedom in SMU’s Cox School of Business. Vance Ginn is an economist in the Center for Fiscal Policy at the Texas Public Policy Foundation. The Texas Public Policy Foundation will hold an event on this issue and more that will be livestreamed today at 12:30 p.m. Eastern.