State legislators need to find a way to boost ranking
California legislators are in the midst of a “special session” to deal with this fiscal year’s budget deficit, estimated at $10 billion.
They should use this session to boost California’s ability to generate economic growth and the tax revenues that go with it. The Golden State could stand for much improvement in this area.
California ranks a dismal 47th out of 50 states in economic freedom, according to the 2008 U.S. Economic Freedom Index.
The Index rankings derive from a comprehensive evaluation of fiscal, judicial, and regulatory indicators such as tax rates, state spending, occupational licensing, environmental rules, income redistribution, tort reform, and prevailing-wage laws. The rankings should be of interest to California legislators grappling with deficits.
In 2005, the 15 freest states saw their tax revenues grow at a rate six percent greater than the 15 states with the least economic freedom. Per-capita income in the 15 most economically free states grew 31 percent faster than in the 15 states with the lowest levels of economic freedom.
In those states with the most economic freedom, employment growth was 216 percent higher than in those states unfriendly to free enterprise and consumer choice.
In California, unemployment is growing. Two years ago the unemployment rate was 4.6 percent. It now stands at 7.7 percent — predictable in a state with conditions hostile to job growth.
In the judicial sector, California fell from a 3 ranking in 2004, one of its few bright spots, all the way to 39 in 2008. The state abounds in regulation and abusive lawsuits — two reasons why California lags far behind its eastern neighbor.
Nevada ranks sixth among the 50 states in economic freedom, up from a solid 12 ranking in 2004. That year South Dakota ranked 15 but has since soared to number one.
The Mount Rushmore State imposes no corporate or personal income tax and does not tax personal property, business inventory, or inheritance. This year Forbes magazine ranked Sioux Falls, South Dakota, as the best smaller metropolitan area for business and careers.
In the 2008 U.S. Economic Freedom Index, western states Idaho, Colorado, Utah and Wyoming all placed in the top 10 in economic freedom. Workers, investors and entrepreneurs seek out such liberated environments. As The Economist recently noted, “hardly a month goes by without Utah announcing a corporate relocation or a new factory.” The unemployment rate in Utah is 3.5 percent, less than half of California’s.
In California, state spending has increased at a faster rate under Arnold Schwarzenegger than under his predecessor, Gray Davis. A $10-billion deficit should not be surprising.
Accounting gimmicks, borrowing and tax hikes will only deepen further crises. If the state legislators want to eliminate deficit disorder, they should expand economic freedom — a strategy that works — in this special session. At 47th out of 50 states, California has practically nowhere to go but up.