The South may abound in sunshine, but when it comes to economic freedom, the region is mixed, according to the 2008 U.S. Economic Freedom Index from the Pacific Research Institute. The Index measures how friendly or unfriendly each state’s government policies are toward free enterprise and consumer choice.
Only Virginia, which placed ninth, ranks in the top 10 for economic freedom. Georgia makes a strong showing at number 11, up from 19 in 2004. South Carolina dropped from 13 in 2004 to a still respectable 17 in 2008. Florida is down from 22 to 28, West Virginia fell from 32 to 38, and North Carolina dropped from a mediocre 24 to a dismal 36. The latter two results are important to keep in mind as their two gubernatorial races unfold.
On the other hand. Alabama improved from 25 in 2004 to a strong 16. Likewise, Mississippi places 19, up from 28 in 2004. Tennessee lost three places, to 29, and Kentucky dropped one place to 40 in 2008. That is better than New York — dead last since 1999 – – and better than the Northeast in general, which tends to have the least economic freedom. But it is still a far cry from number one South Dakota.
The economic freedom rankings derive from a comprehensive evaluation in each state of fiscal, judicial, and regulatory indicators such as tax rates, state spending, occupational licensing, environmental rules, income redistribution, tort reform, and prevailing-wage laws, to name a few. A state’s tax policy looms large.
South Carolina caps automobile sales taxes at $300, but charges personal property tax on the value of cars. Alabama has one of the lowest property tax rates in the count&, but imposes high taxes on sales and public utilities. Public utility taxes are low in Arkansas, but income taxes remain high.
Virginia’s top-10 rank is largely driven by its small welfare sector, while Georgia gets high marks for its fiscal and regulatory structure. But both states have relatively large governments, which pulls down their rankings. Indeed, in the region, only South Carolina ranks favorably in government size. South Carolina’s ranking is also buoyed by its small welfare sector, which is true for half the other southern states.
All states could learn from 2008 frontrunner South Dakota, which placed 15 in 2004. South Dakota has no corporate income tax, no personal income tax, no personal property tax, no business inventory tax, and no inheritance tax. South Dakota has the lowest cost of doing business, according to the Milken Institute.
The South could also leam from states in the Great Plains and Rocky Mountains, which tend to have the most economic freedom. Colorado, Kansas, Oklahoma, Utah, and Wyoming all rank in the top 10. Their better performance derives from lower government expenditures, particularly welfare spending. The Upper Midwest is also experiencing a renaissance of economic freedom. Minnesota shot up 18 places, from a lowly 44 in 2004 to a much stronger 26.
Economic freedom has a direct impact on the pocketbook. In 2005, per-capita income in the 15 most economically free states grew 3 1 percent faster than in the 15 states with the lowest levels of economic freedom. Also in 2005, the 15 most free states saw their general fund tax revenues grow at a rate more than 6 percent higher than the 15 states with the least economic freedom. In other words, economic freedom benefits workers, businesses, and governments.
Economic freedom also influences where people seek jobs and businesses locate. According to United Van Lines, many people are moving to South Dakota. In contrast, people are fleeing sunny California. which ranks 47 in economic freedom.
Migration motivated by economic freedom will also impact congressional apportionment following the 2010 census. For example, current projections have California losing a congressional seat due to a mass exodus.
Every state in the South outranks California, but the region could be much stronger. Like California, the South has natural assets like a pleasant climate. But the region could draw more workers, investors, consumers, and entrepreneurs by expanding economic freedom. That will boost prosperity for everyone in the region and set a strong example for the rest of the nation.