Virginia ranks third out of 50 states in economic freedom, according to the U.S. Economic Freedom Index: 2004 Report. A recent tax increase, unfortunately, will put downward pressure on the state’s future ranking.

The Index, published by the California-based Pacific Research Institute in association with Forbes magazine, looks at how friendly – or unfriendly – state governments are toward free enterprise and consumer choice.

Developed by economists Ying Huang and Robert E. McCormick of Clemson University, the Index factors more than 140 variables, ranging from taxes to environmental regulations to tort reform to property rights.

The rankings are based on five types of government intervention in markets: fiscal, regulatory, judicial, size of government and welfare. The results will shatter some stereotypes.

Kansas ranks highest in economic freedom, followed by Colorado, Virginia, and Idaho. Rhode Island, Connecticut, California, and New York are at the bottom.

Why is Virginia currently the only southern state in the top 10? Virginia has relatively low welfare spending, which limits income redistribution, allowing people to keep what they earn. It has a relatively small government sector with less red tape. Virginia also has had lower levels of taxing and spending.

The Index, however, is just a snapshot in time. Recently, things have changed for the worse. The hefty $1.36 billion tax increase passed last month by the General Assembly will not help Virginia’s future ranking. More importantly, the tax increase is sure to drive out businesses and jobs. Virginia will learn by direct experience that it can’t tax its way to prosperity.