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Instead of doubling down on outdated policy ideas such as raising taxes and increasing government spending, state governments facing budget crises should look to successful states for ideas on how to jumpstart their own economies and reverse population declines. Fortunately, there are resources they can use to make the case for innovation in government.
This year’s edition of the American Legislative Exchange Council’s (ALEC) Rich States, Poor States report shows the economic outlooks of states such as Illinois and Kentucky improved significantly since the release of ALEC’s 2014 report, as their respective leaders learned from the examples of other states.
The report measures and ranks states’ relative economic performance using three criteria: the state’s gross domestic product output, the net number of people domestically relocating to or from the state, and the state’s nonfarm payroll employment numbers. State policies strongly affect these three factors, the report explains.
The report also details 15 “policy variables” that impact how and why capital—not only money, but people—moves from one state to another. These variables include marginal corporate and personal income tax rates, the progressivity of personal income tax structures, and the ratio of government employees to total population.
“Generally speaking, states that spend less—especially on income transfer programs, and states that tax less—particularly on productive activities such as working or investing—experience higher growth rates than states that tax and spend more,” the report says.
Those observations really shouldn’t surprise anyone, but too few states embody them in their taxing and spending policies. In addition, the numbers do have some instructive details.
For example, Kentucky’s economic output was lower than that of 29 states, reflecting past fiscal sins, but the state’s migration numbers, which react directly to current conditions, were better than almost two-thirds of the states.
Also on a positive note, Kentucky’s property tax burdens are among the lowest in the nation, as Kentucky homeowners were charged an average of $20.29 in property taxes per $1,000 of personal income. The state’s relatively low sales taxes and personal income tax structures helped boost the state’s economic ranking.
On the other end of the scale, Illinois, led by incoming Republican Gov. Bruce Rauner, is an example of how states can learn from other states’ examples to bring success home.
In 2014, Illinois was near the bottom of the pack, ranking 48th out of 50. In 2015, Illinois climbed eight spots thanks to recently legislated tax reforms. One of those changes was a decision to allow income tax hikes enacted in 2011 to expire.
Speaking of Illinois’ jump in the rankings, ALEC’s Tax and Fiscal Policy Task Force Director Jonathan Williams told Watchdog.org, “Sometimes you have to celebrate those small victories,” referring to how the state got it “less wrong” than in past years.
As Rich States, Poor States proves, attracting new residents and new businesses—and in turn new tax revenue—is not rocket science.
By keeping tax burdens low and government small, states can encourage businesses and residents of other states to relocate, bringing their capital with them. Kentucky is on the road to prosperity, Illinois is improving, and states following in their footsteps will prosper as well.