THE RESULTS ARE IN, and for residents of America’s Northeast, the news is not good. With the notable exception of New Hampshire, the nine states of the Northeast continue to be the worst places for economic freedom.
According to the 2008 U.S. Economic Freedom Index from the Pacific Research Institute, which measures how friendly or unfriendly state government policies are toward free enterprise and consumer choice, the northeast region of the country continues to lag behind the rest of the United States. New York stood out as the most economically oppressive state for the third time in a row.
Rhode Island, New Jersey, Pennsylvania and Vermont all ranked in the bottom 10. Massachusetts, Maine and Connecticut came out slightly ahead, ranking 33, 35 and 39, respectively.
New Hampshire is the sole exception to the regional trend, ranking as the eighth most economically free state in the country in 2008, keeping the top-10 place it has held since the index was first published in 1999.
The economic-freedom rankings derive from a thorough evaluation of fiscal, judicial and regulatory indicators such as tax rates, state spending, occupational licensing, environmental regulations, income redistribution, tort reform and prevailing-wages laws, to name just a few. A state’s tax policy looms large. States in the Northeast have the highest marginal income tax and corporate tax rates, they have raised excise levies on gasoline and cigarettes, they have the largest state budgets and they have continued to impose punitive regulatory policies on businesses.
All of these states have minimum-wage laws higher than federal levels and none has a right-to-work law. It should come as no surprise, then, that these states have also experienced out-migration of population and jobs and anemic income-growth rates, fully 20 percent below national averages.
New Hampshire stands in marked contrast to its anti-freedom neighbors. It ranks among the five lowest states in per-capita tax burdens, it has no state sales tax or inheritance tax, and its regulatory climate is far friendlier than its neighbors. The result is that New Hampshire has experienced net in-migration, higher rates of growth in per-capita income, and much needed economic vitality in tough times.
The findings of the Index demonstrate that there is a strong empirical basis for the belief that jobs and people are moving out of the Northeast and into the Sunbelt, Rocky Mountain, and Upper Midwest states. With that population movement goes the entrepreneurial talent, drive and investment that will help these states to prosper despite the current hard economic times.
This so-called “brain drain” will make the less economically free states less competitive. Farther down the horizon, the lack of economic freedom will also translate into decreasing apportionment in the U.S. House. One of the great effects of our federal system of government is that the states can compete to attract citizens. When one state in a region, such as New Hampshire, vastly exceeds its neighbors in economic freedom, it draws people to move there.
Witness the boom towns just north of the Massachusetts border. Nashua has twice earned Money magazine’s award as the “best place to live in America” and Manchester is New England’s fastest growing metropolitan area. Like much of New England, the single-industry dependence on the textile industry has long since departed. Unlike most of the other textile towns of New England, New Hampshire’s friendly economic environment has attracted a diversified job base in the manufacturing, service and high-tech industries.
The influence of a bastion of freedom like New Hampshire cannot be underestimated. Frustrated Massachusetts residents, for example, have for the second time in the last decade put state income-tax repeal on the November ballot. Voters and policy makers in places like New York, Massachusetts and Connecticut would be wise to follow the model of New Hampshire and the other leading states in the Index.
To stem the tide of out-migration and brain drain, these states need to lower or eliminate personal and corporate income taxes, reduce the regulatory burden on business, and institute tort reform. If these states increase economic freedom, they will not only move up in the rankings, they will also experience the amazing growth and prosperity that is being seen in places like South Dakota and Colorado.
Lawrence J. McQuillan is director of business and economic studies at the Pacific Research Institute, and Michael T. Maloney and Eric Daniels are professors of economics at Clemson University. The three are authors of the 2008 U.S. Economic Freedom Index.