Liberty = Prosperity

The United States Chamber of Commerce recently released a report titled “The Impact of State Employment Policies on Job Growth,” looking at variance in state employment regulations and its effect on economic growth. The Chamber report places states into 3 tiers: good, fair, and poor.  Americans for Tax Reform took a look at a number of other policies to see if there was any corollary relationship with economic performance. Area of analysis include: tax burden, spending restraint, labor policy, and partisan control.

Tax Burden

When comparing states placed in the top and bottom tiers by the Chamber, one will find a substantial difference in marginal tax rates for both individuals and corporations.  Top tier states have an average marginal income tax rate 25.3% lower than bottom tier states.  Top tier states also have lower corporate rates – 27% lower on average than bottom tier states. When it comes to overall tax burden, states rated as bottom performers by the Chamber have a state and local tax burden that is 12.8% higher on average than the top tier states. .

Top Tier-Bottom Tier	Top Tier	Bottom Tier	Difference
Top Marginal Income Tax Rate	4.86%	6.09%	25.3%
Top Corporate Income Tax Rate	5.29%	6.72%	27%
State/Local Tax Burden	8.90%	10.04%	12.8%

Spending Restraint

As was the case with level of taxation, when comparing state spending, we once again find significant variance between top tier states and bottom tier states.  Prior to recession, in 2007, the Chamber’s top tier states spent an average of 9.6% of state GDP compared to the 10.6% for bottom tier states spent; a difference of 10.4%.  In 2009, top tier states spent 9.9% of GDP compared to the bottom tier’s 11.1%; an increased difference of 12%.  It is clear that the top performing states in the Chamber’ report spend a significant amount more as share of their economy.  

It should also be noted that bottom performing increased spending at a rate 66% great than top performing states during the recession.

Top Tier-Bottom Tier	Top Tier	Bottom Tier	Difference
2007 State Government Spending as Percentage of GDP	9.6%	10.6%	10.6%
2009 State Government Spending as Percentage of GDP	9.9%	11.1%	12%
Percent Change in Government Spending	0.3%	0.5%	66%

Right-to-work and Collective bargaining restraints for Public Sector Employees

Right-to-work along with scope of public sector collective bargaining rights appears to be another factor in how state’s faired in the report.  Of the states that the Chamber placed in the top tier, all are right-to-work states. Four of the TK top tier states (Georgia, North Carolina, Texas, and Virginia) outlaw public sector collective bargaining completely and three states (Alabama, Mississippi, and Utah) that allow some form of collective bargaining for certain public sector employees.  While roughly half of the top tier states restrain government sector collective bargaining, all bottom tier states allow full collective bargaining for their public employee. Only one bottom tier state, Nevada, is a right to work state.  Not unexpectedly, Nevada also has the lowest spending and lowest tax burden of the bottom tier states.

Partisan Control

Perhaps the biggest factor when it comes to performance in the Chamber’s report is partisan control of state government.  Aside from North Carolina, all top tier states are all either Republican-controlled or have split control.  Of the bottom tier states, all are either under total Democrat control or split control.

Of the top tier states, those under Republican control are shown to have a more favorable business tax climate than split control top tier states, In top tier states with total Republican control, the average top marginal income tax rate is 26% less that split controlled top tier states; top corporate tax rates drop 9.1%, and state and local tax burdens drop 1%. 

The contrast between top tier Republican-controlled states and bottom tier Democrat-controlled states is even greater.  The top marginal income tax rate for Republican states drops 26.9%, the top corporate income tax drops 19.1% and the state and local tax burden difference grows from 1.14% to 1.45%. 2007 Republican state spending per GDP drops from 9.6% to 8.5% and 2009 Republican state spending per GDP drops 11.2%.  Once again, the differences between Republican and Democrat states also increases with 2007 spending differing from 1% to 2.1% and 2009 spending from 1.2% to 2.3%.

Republican-Democrat	GOP	DEM	Difference
2007 State Government Spending as Percentage of GDP	8.5%	10.6%	24.7%
2009 State Government Spending as Percentage of GDP	8.9%	11.2%	27.0%
Percent Change in Government Spending	0.4%	0.7%	75.0%
Percent Change in Real GDP Growth (08-09)	-1.05%	-2.40%	118.10%
Top Marginal Income Tax Rate	3.83%	6.33%	59.80%
Top Corporate Income Tax Rate	4.44%	7.06%	59.40%
State/Local Tax Burden	8.81%	10.26%	17.30%
Unemployment Averages 2007	3.8%	4.8%	26.3%
Unemployment Averages 2010	8.4%	9.3%	8.3%
Percent Change Unemployment 07-10	4.6%	4.3%	6.5%
Gain/Lose Congressional Seats	9	-3	133.0%

Results

When all of these factors are combined, a state’s economy fares better than a state with the opposite factors (higher taxes, more spending, and union and democrat controlled).  The GDP growth for top tier states is 1.73% higher than bottom tier states.  Unemployment was .6% lower in 2007 and 1.2% lower in 2009.  Unemployment growth during the recession was less in the top tier states (4.5%) than the bottom tier states (5.1%).  The states in the top tier are also among the states gaining congressional states with a net total 9 new seats while the bottom tier states are losing a net total of 4 seats.  All of these results point to one conclusion: More freedom from government = More prosperity.

Top Tier-Bottom Tier	Top Tier	Bottom Tier	Difference
Percent Change in Real GDP Growth (08-09)	-0.80%	-2.53%	216.30%
Unemployment Averages 2007	4.0%	4.6%	25.30%
Unemployment Averages 2010	8.5%	9.7%	27.00%
Percent Change Unemployment 07-10	4.5%	5.1%	12.80%
Gain/Lose Congressional Seats	9	-4	15.0%