At the federal level, the fate of former President Donald Trump’s Tax Cuts and Jobs Act (TCJA) of 2017, which resulted in a $1.5 trillion net tax cut, remains unclear. If President Biden gets his way and Congress fails to act, the most popular TCJA tax cuts for individuals and small businesses will expire at the end of 2025.
Washington is already taxing more than its fair share. The federal government collected $4.4 trillion in tax revenue in 2023, up from $2.78 trillion a decade earlier. Clearly, the federal government does not have a revenue problem but a spending problem, as the national debt hurtles toward $35 trillion.
To counter D.C.’s big-government policies, many states are implementing pro-growth and pro-worker policies, including a dozen that lowered their income tax rates in 2023.
These states are highlighted in the newly released 17th edition of “Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index.” Since 2007, our annual report has documented how cutting taxes, paying down debt and maintaining free-market policies have significantly helped states attract new residents and jobs.
State policy matters for economic growth: The latest census data documents that millions of Americans are voting with their feet by moving to states that offer more freedom and greater opportunity.
With that in mind, the top five states in economic outlook for 2023 may not come as a surprise: Utah, Idaho, Arizona, North Carolina and Indiana. The least competitive states are likely not surprising either: New Jersey, California, Illinois, Vermont and — dead last as it has been for 11 years — New York.
For the 17th year in a row, Utah ranks No. 1 in economic outlook. During this time, the Beehive State has created a flat personal income tax (and continued to chip away at its rate, which is now under 5 percent); reformed its public pension system to the benefit of both workers and taxpayers; created an innovative process to avoid becoming overly dependent on federal funds; and kept property taxes in check with its pioneering “Truth-in-Taxation” law.
Across Utah’s northern border, Idaho ranks second in the nation for economic outlook. The Gem State joined the 2022 Flat Tax Revolution, condensing both personal and business income tax brackets into a flat 5.8 percent rate. Idaho also boasts a right-to-work law, no death taxes and relatively low property tax burdens. Unsurprisingly, Idaho netted 225,000 new residents over the past decade.
Texas was one of the biggest winners this year, moving up seven places to sixth overall for economic outlook. The improved rankings can be attributed the largest state tax cut package in Texas history in 2023. Led by state Sen. Paul Bettencourt (ALEC’s 2023 State Legislator of the Year), the tax cut amounted to $18 billion in property tax relief. On top of that, Texas is one of nine states without a personal income tax and has netted a whopping 1.4 million new residents since 2013.
On the other end of the spectrum, New York once again ranks dead last for economic outlook due to its punishing tax burdens, overspending and heavy-handed regulatory policies. The Empire State has also hemorrhaged more than 1.9 million residents in the past decade — and more than 216,000 in the past year alone.
California is also one of the worst states for economic outlook. The Golden State has the nation’s third-highest top marginal personal income tax rate and the most progressive personal income tax structure. In addition to its $16-per-hour minimum wage (second highest in the nation), worker freedom policies such as right-to-work laws are nonexistent. The California Exodus shows no signs of slowing down — the state saw a net out-migration of 338,000 individuals between July 2022 and July 2023. And with all of the emphasis on raising taxes over the years and all of this out-migration, California now suffers from a staggering $73 billion budget deficit.
With the future of the historic 2017 federal tax cuts unknown, many states are leading the way with lower taxes, responsible budgeting and other pro-growth economic policies. As “Rich States, Poor States” reveals, Americans will continue their march toward these freedom-loving states. Federal leaders should look to states like Utah and Texas for inspiration and avoid the mistakes of New York and California.
Jonathan Williams is the executive vice president of policy and chief economist at the conservative American Legislative Exchange Council. Follow him on X at @TaxEconomist. Lee Schalk is vice president of policy at ALEC.
Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
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