Policies that Fuel Economic Performance

Data from the Tax Foundation and a recent ALEC study suggests that broad competitiveness policies can help fuel economic growth.
by , , , | April 15, 2011 AT 9:00 AM

What public policies drive job creation and economic growth? It is a critical question for states such as Michigan, which has had one of the poorest performing state economies in the U.S. over the last decade. While most economic development initiatives involve targeting certain industries, we recently suggested five broad reforms for Michigan designed to energize the state's economy. The reforms ranged from tax cuts and labor reform to privatization and reduction of public-sector jobs.

Our research on the Michigan economy triggered the idea to study the key policies which have fueled high performing states over the past decade, and are now leading the country out of recession.

Based on data from the Tax Foundation and a 2010 study by the American Legislative Exchange Council (ALEC), a free-market policy organization, we have constructed a brief comparison of public policies in the states that ALEC identified as having the "best" economic outlook in 2010 (Arizona, Colorado, Florida, South Dakota and Utah) with those that had the "worst" economic outlook (California, Illinois, New Jersey, New York and Vermont). The findings are interesting and thought-provoking. Consider the following:

Work Conditions. Four out of the five states ALEC deems the best are right-to-work states while all five of the worst states are union shop states.

Minimum Wage. All five of the best states had the lowest minimum wage rate in the country, which is the federal mandated floor of $7.25 per hour. Three of the five worst states had among the highest hourly minimum wage rates in the country, ranging from $8.00 to $8.06 per hour.

Tax Reforms. In general, state tax reforms implemented in 2008 and 2009 greatly favored the best states due to their growth- friendly tax policies as evidenced by the fact that personal income taxes declined on average $2.86 per $1,000 of income over this period. Less friendly growth policies were adopted in the worst states with personal income taxes on average increasing $22.59 per $1,000 of personal income over the same period. In addition, large budget deficits loom in the worst states leaving us to believe that tax increases are on the horizon for these states.

Corporate and Investment Tax Policy. Corporate and inheritance taxes in the best states are among the lowest in the country for four of the five states, and at a reasonable level in Arizona. The five states with the worst outlook are among the highest in said categories. As an example, in the best states, state corporate income tax rates averaged five percent while the average rate of taxation on corporations was just below ten percent in the worst states.

Legislatures. Four out of the five best outlook states have part-time legislatures and lower average costs than their worst state counterparts. In fact, worst state legislators are paid nearly 20 percent more in wages, on average, when government is in session 20 percent longer, and staffs are more than 100 percent larger on average than their best state counterparts, according to 2009 National Conference on State Legislatures data.

Population Growth. Finally, the best outlook states realized a combined population growth total of nearly 2.3 million people from 1999-2008, while the worst outlook states saw their total population decline by just under 4.3 million people over the same period.

Rather than identifying hot industries for subsidies, tax breaks and other targeted job creation actions, this data suggests that broad competitiveness policies can help fuel economic growth. A comprehensive benchmarking of best practices by country and by state will be of immense help to political leaders as they strive to adopt rational public policy and restore economic vitality across the nation.

Keith A. Pretty | Northwood University | bfc@hks.harvard.edu
Timothy Nash | Northwood University | bfc@hks.harvard.edu