While the federal government continues to suffer from its regular election season bout of partisan gridlock, states continue to lead the way with policy solutions that address real issues facing families and businesses. From providing liability protections for employers that are following the rules, enhancing liquidity for businesses through tax changes and providing much needed regulatory relief, state policies are making a real impact for millions of Americans.
Which states are best positioned to recover once the COVID-19 pandemic has passed? Our latest study on economic competitiveness, “Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index,” helps policymakers answer that question. The report examines how state economic policy can help or hinder how successfully states compete for residents, job creators and economic growth.
The COVID-19 economic shutdown has slammed the brakes on state economies, as it sadly crushed many businesses and sent millions into unemployment. However, economically competitive states will be better positioned to reopen businesses and get people back to work. Through 15 equally weighted policy variables proven to generate economic growth, “Rich States, Poor States” measures which state are economically competitive and thus better prepared for reopening.
The top five states in economic outlook are (in order) Utah, Wyoming, Idaho, Indiana and North Carolina, while the least competitive states are California, Illinois, New Jersey, Vermont – with New York dead last. It is important to note while California, Illinois and New York are currently among the largest state economies, economic trends suggest a different future. Since 2009, California and Illinois have lost a combined 1.7 million residents on net to other states. New York alone has shockingly lost over 1.3 million residents over the same period.
Comparing the top five states in economic outlook to the bottom five states mentioned above, the competitive states have seen nearly 565,500 residents move in on net, while the uncompetitive states have lost a combined 3.5 million residents on net to other states. Americans continue to “vote with their feet” towards states that value lower taxes and, as a result, greater economic opportunity.
New York Governor Andrew Cuomo is very aware of the outmigration plaguing high-tax New York City. During a recent press conference, Governor Cuomo said, “I literally talk to people all day long who are now in their Hamptons house…or in their Hudson Valley house or in their Connecticut weekend house, and I say, ‘You gotta come back, when are you coming back? They’re not coming back right now. And you know what else they’re thinking? ‘If I stay there, I pay a lower income tax.’” It is heartening to see even Governor Cuomo seems to understand how high taxes drive out-migration of taxpayers.
Considering how economically competitive states widely outperformed high-tax states coming out of the Great Recession, state policymakers looking to capitalize on economic reopening should consider ways to make their state more competitive relative to their peers. First, competitive states avoid passing tax increases during temporary budget shortfalls resulting from an economic downturn. While the revenue might help fix a budget gap in the short term, those tax increases often become permanent and dampen economic growth, discourage business in-migration and erode tax bases in the long term. Competitive states also avoid excessive taxes on capital, like personal income taxes and business taxes.
Despite having higher tax rates, the economically uncompetitive states also suffer from massive unfunded pension liabilities and other forms of state debt. Our research in “Unaccountable and Unaffordable” finds the bottom five states in economic outlook owe retirees a combined $1.6 trillion in unfunded pension liabilities. These same states already had serious budget shortfalls prior to the COVID-19 pandemic, but the economic shutdown has led to the governors of New York, Illinois, California and New Jersey to lobby Congress for a bailout. High taxes do not lead to a better-funded government. Instead, high taxes fuel higher spending and, when a rainy day comes, high-tax states have more problems and fewer options than fiscally responsible states.
With our new “Rich States, Poor States” report, state policymakers have a reliable tool to help guide policymaking toward stronger, more successful state economies as we emerge from the COVID-19 shutdowns.
Jonathan Williams is the executive vice president of policy and chief economist at the American Legislative Exchange Council. Follow him on Twitter @taxeconomist. Skip Estes is legislative manager at the ALEC Center for State Fiscal Reform