Commentary: The U.S. economy has recently been in the midst of the slowest growth recovery since World War II. That slow growth has coincided with a steady decline in economic freedom (freedom from government meddling in the economy), as taxes, spending, and regulation have all been on the rise. In fact, a recent report ranked the U.S. 16th in the world for economic freedom, down from 3rd in 2000. This is concerning because numerous studies show that economic freedom is associated with prosperity.
The pattern across the states, however, is quite varied and shows promise. According to this year’s newly released Economic Freedom of North America report, which ranks states on how free their economies are, the average level of freedom at the state and local level has risen slightly in recent years.
States that have seen the fastest growth, like Texas and Florida, tend to have a policy strategy that differs from the national trend: maximize economic freedom. They attract new businesses and residents by keeping the burden of taxes, spending, and regulations low. In contrast, states like New York and California that take the opposite approach have seen much less economic prosperity.
Residents and businesses have been voting with their feet in favor of economic freedom. Over the last three years, population in Texas and Florida has grown more than two-and-a-half times faster than it has in New York and California. Employment and income have also grown faster in those two states.
Not surprisingly, Texas and Florida were at the top of EFNA’s list for economic freedom among the largest states, while New York and California were at the bottom, ranked 50th and 49th respectively. New Mexico is next lowest, and its economic growth record has been even worse than that of New York and California.
What’s going on in those states at the bottom like New Mexico should be of great concern. There have been over 400 scholarly articles by independent researchers examining economic freedom at the national level, and over 200 at the state level (using the EFNA). Most of that literature finds that areas with economic freedom tend to have more prosperous economies, as well as a variety of other positive outcomes. High levels of taxes, spending, and regulations make it harder for entrepreneurs to be successful. When entrepreneurs cannot expand their businesses and hire new workers, it hurts everyone.
New Mexico has lots of room for improvement. For example, New Mexico’s personal income tax rate of 4.9% is higher than four nearby states (Arizona, Colorado, Kansas, and Texas, which has no income tax at all) and only slightly below the 5.0% rate in neighboring Utah and Oklahoma. That puts it at a competitive disadvantage. Also, New Mexico scored particularly poorly on the burden of the sales tax, ranking worse than all but three other states.
Furthermore, New Mexico’s state and local government bureaucracy is the second largest in the nation, representing nearly 15% of the total workforce. That excessive bureaucracy is one of the reasons for those higher taxes New Mexicans must face.
In addition, New Mexico’s state minimum wage is more burdensome than all but three states. And, five cities and counties in New Mexico were amongst the first in the nation to impose even higher local minimum wages. This puts the state at a disadvantage compared to other states with which it must compete for employers.
Finally, New Mexico has 46 different targeted business incentives programs, more than all but eight states. In addition to squandering scarce tax dollars, such cronyism creates an uneven playing field that makes it harder for entrepreneurs and small businesses – the backbone of our economy – to be successful. Eliminating these corporate welfare programs would make it easier for businesses to expand and hire new workers, which would be beneficial to all, not just those companies with political influence.
Politicians in Santa Fe and at the local level should reduce corporate welfare spending that puts small businesses at a disadvantage, cut taxes and regulations, and shrink their government bureaucracies. Doing so would help New Mexico finally start to climb up from the bottom of the list for both economic freedom and economic prosperity.
Dean Stansel is an economist at the O’Neil Center for Global Markets and Freedom in Southern Methodist University’s Cox School of Business and the primary author of the annual Economic Freedom of North America report (available at www.freetheworld.com).