Tuesday, May 19, 2009

A Tale of Twenty States

Our story begins with Twenty states. In the last decade ten became richer and ten became more poor. The question that matters for policy experts should be "why?" Ten states enjoyed an upward economic and population trend between 1997 and 2007, ten others saw serious decline in the same time period. The American Legislative Exchange Council recently published a study (Rich States, Poor States) written by economists Steve Moore of the Wall Street Journal and Arthur Laffer, most famous for being behind the development of Ronald Reagan's economic agenda. These two economists have gone "under the hood" to determine why some states are prospering, while others suffer.

The Winners

The states that have enjoyed the most prosperity over the last decade, according to the study, are Utah, Colorado, Arizona, Virginia, South Dakota, Wyoming, Nevada, Georgia, Tennessee, and Texas. On average, these ten states saw an 85.1% increase in the states' gross state product growth, an 87.9% increase in personal income growth, a 55.9% increase in personal income per capita growth, and a 20.4 percent increase in population growth.

The Losers

On the other end of the spectrum you have Hawaii, Pennsylvania, California, Illinois, Ohio, New Jersey, Maine, Rhode Island, Vermont, and New York. These unfortunate ten states saw an 59.3% increase in the states' gross state product growth, an 60.7% increase in personal income growth, a 52.3% increase in personal income per capita growth, and a mere 4.4 percent increase in population growth.

The Similarities and Differences Between Winners and Losers

The similarities between the winners is fairly obvious geographically -- they are in a similar geographic area -- a collective of states in the South and West, with the only exception being South Dakota. Meanwhile, the losers are heavily concentrated in the economic black hole of the Northeast (with the exceptions of Illinois, Ohio, Hawaii, and California).

Geography, however, is not nearly as important as policies, when it comes to the differences between the winners and losers. For example, all but one of the winners are Right to Work states (Colorado). Meanwhile, all of the losers are under force unionism. When unions (and their higher benefits, wages, and other labor expenditures) are a fixed cost of doing business, those states are simply less attractive.

It doesn't stop with unions. The ten losers are noted for having excessively high taxes on businesses and high income earners. In other words, they are attacking the geese that lay the golden eggs. When these income earners feel such pressure, they know they can't always or quickly "fight" the policies effectively, so they take "flight" to states that are friendlier to business and wealth creation. Furthermore, the losers are known for more excessive regulations than the winners, another cost in time and money in building a business. Finally, these losers often have crippling licensure laws that undermine entrepreneurship and economic activity.

Laffer and Moore's study goes much further by examine several "principles" of effective taxation and shows huge disparity between the winners and losers. Some of those include:

  • The more you tax something, the less you get of it

  • Taxes create a wedge between the cost of working and the rewards of working

  • If you tax too much, revenues can decline, because the incentives to produce decline (or those who are being taxed move to places that are more tax friendly)

  • An economically efficient tax system has a sensible, broad tax base and a low tax rate

  • If there are two locations for decision makers to choose and one has significantly higher tax rates, those decision makers will typically choose the other location.

It is not surprising that the winners fall squarely on one side when it comes to the above principles and the losers fall on the other. The results of the states who ignore the ability of businesses and the affluent to flee such policies has led to a huge decline in both prosperity and even population growth in the "loser" states. The study should be read by policy makers, business owners, and individuals who want to live in states of prosperity and not poverty.

Kevin Price is Host of the Price of Business, the longest running show on AM 650 (M-F at 11 am) in Houston, Texas and on AOL Radio. Eric Bolling of Fox News and Fox Business says that Price’s Blog “is very influential and moves the blogosphere.” Steve Moore of the Wall Street Journal calls Price the “best business talk show host in the country.” Find out why and visit his blog at www.BizPlusBlog.com and his show site at www.PriceofBusiness.com. You can also find Price on Strategy Room at FoxNews.com.

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