Economic freedom is essential for economic growth. If the government makes it difficult for people to start businesses, choose their own forms of work, or invest in businesses, economic growth will stagnate. Florida, New Hampshire and South Dakota offer their residents the most economic freedom, according to a new study.
For the past 18 years, the Fraser Institute has ranked the 50 states and the provinces of Canada and Mexico based on “the extent to which individual provincial and state policies have supported economic freedom, the ability of individuals to operate in the economic sphere free from unreasonable restrictions.”
This year, Florida, New Hampshire, South Dakota, Texas and Tennessee are the top five states in the North America Economic Freedom Report (EFNA). New York is the lowest state, followed by California, Hawaii, Vermont, and Oregon (Puerto Rico is last but is a province, not a state. See image below).
Numerous research results show that more state economic freedom goes hand in hand with faster economic growth, less unemployment, higher per capita income, more entrepreneurial activity and more population growth. In this year’s report, the authors also show that states and provinces that increase economic freedom experience faster growth in per capita income, on average (see chart below).
There are several things states can do to increase economic freedom. Tax reforms that lower income tax rates and reduce the burden of other taxes that discourage investment, such as
New Hampshire, which ranks second in the EFNA Index, has no income tax and recently lowered corporate taxes to encourage investment. States that want to strengthen economic freedom should follow this example.
Too much regulation also reduces economic freedom. According to George Mason University’s Mercatus Center, California and New York are two of the most heavily regulated states in the country. Meanwhile, South Dakota, New Hampshire, Tennessee, and Florida have relatively low levels of regulation. It’s no surprise that California and New York have low levels of economic freedom, while the last four states are among the top five freest.
States looking to ease their regulatory burdens to increase economic freedom have several options, including regulations to cut red tape, phase out provisions, and improve their economic analysis to prevent the most damaging regulations from being implemented.
State governments should also review their spending. High levels of government spending crowd out economic activity, shifting resources — workers, materials, land — and tax dollars from individuals in the market to politicians and bureaucrats. Government has a role to play in the marketplace — providing genuine public goods, upholding the rule of law, maintaining a basic safety net — but overspending can drive inflation, reduce incentives to work, and slow innovation by undermining risk-taking and entrepreneurship. State governments that spend money efficiently and focus on core activities create more space for individuals to thrive in the private sector.
Economic freedom is an important motor for economic progress. America’s economic success is in large part the result of the high degree of freedom enjoyed by our workers, investors, and entrepreneurs. Economic freedom is similarly important at the state level and the annual EFNA report is a great reminder of that. While Florida, New Hampshire, and South Dakota are already relatively free, there’s always room for improvement. Hopefully next year’s report will show significant improvements in economic freedom across the country.