Rich States, Poor States

If you care about taxes and spending at the state level, or if you are simply curious, you should read "Rich States, Poor States." Last week, the American Legislative Exchange Council (ALEC) released the third edition of its highly readable report. Written by Arthur B. Laffer, Stephen Moore, and Jonathan Williams, the report examines "why the economic crisis has been so hard on the states, what the states should do to alleviate the pain, and what they should avoid." In addition, the report provides the very useful 2010 ALEC-Laffer State Economic Competitiveness rankings for each state based on their economic policies. The authors also show "which states took the right corrective actions and which states took the wrong ones in this fiscal storm." You can find both electronic and print versions of the report available here.

To summarize, the report shows that the states can trace their budget problems to binge spending over the last several years. The states spent freely on existing and new programs when times were good and the coffers were full of tax revenues. Now, the states aren't collecting the same revenues as they did during the boom years. They now face huge deficits, underfunded liabilities, and the prospect of high, job-killing tax increases to pay the bills they ran up over the years. Additionally, the report looks at the impact of some states use of "progressive policymaking," or targeted taxing and spending, and how it has actually contributed to a loss of revenues due to taxpayer flight to states with lower taxes. Below are the report's ten best and ten worst states.

Ten Best:

1. Utah

2. Colorado

3. Arizona

4. South Dakota

5. Florida

6. Wyoming

7. Idaho

8. Virginia

9. Georgia

10. Tennessee

Ten Worst:

41. Oregon

42. Ohio

43. Pennsylvania

44. Maine

45. Rhode Island

46. California

47. Illinois

48. New Jersey

49. Vermont

50. New York

What strikes me about this list is that the states that are ranked the highest are ones that have either undertaken real budget and tax reforms over the last several years or have limited tax burdens. In Colorado, the state has spending and tax limitation provisions in its constitution. Florida, Wyoming, South Dakota, and Tennessee all have no personal income tax. Meanwhile, the states that rank the lowest, including New Jersey, New York, and California, have some of the highest tax burdens and spend the most in the nation.

"Rich States, Poor States" also looks at the impact that the "stimulus" from Washington is having on the states. The impact is not good because states are using the stimulus as if it were found money to budget for programs they cannot afford over the long term. This should serve as a warning to the politicians in Washington who think we can spend our way out of problems instead of reforming policies to promote economic activity, job growth, and prosperity. 

Of course, the report is not all negative. In fact, the report spends an entire chapter discussing Missouri and the good policies it is pursuing. There is an effort underway in the Show Me State to reform the tax code to make it simpler, fairer, and more competitive. It is worthwhile to read about Missouri and its effort is a story we should all follow closely in the months ahead.

I'll blog more about this report and its findings in the coming days and weeks, so check back here often. But in the meantime, if you are interested (or concerned) about taxes, spending, and other economic policies at the state level, "Rich States, Poor States" is a must read.