RICH STATES / POOR STATES: / POOR STATES: RICH STATES RICH STATES POOR STATES ALEC-Laffer State Economic Competitiveness Index By Arthur B. Laffer and Stephen Moore ALEC-Laffer State Economic Competitiveness Index Competitiveness Economic ALEC-Laffer State 1129 20th Street, N.W. • Suite 500 • Washington, D.C. 20036 (202) 466-3800 • Fax (202) 466-3801 • www.alec.org RICH STATES POOR STATES ALEC-Laffer State Economic Competitiveness Index By Arthur B. Laffer and Stephen Moore Rich States/Poor States ALEC-Laffer State Economic Competitiveness Index By Arthur B. Laffer and Stephen Moore About the Authors Dr. Arthur B. Laffer Arthur B. Laffer is the founder and chairman of Laffer Associates, an economic research and consulting fi rm. As a result of Dr. Laffer’s economic insight and infl uence in starting a worldwide tax-cutting movement during the 1980s, many publications have named him “The Father of Supply Side Economics.” He is a founding member of the Congressional Policy Advisory Board, which assisted in forming legislation for the 105th, 106th and 107th Congress. Dr. Laffer served as a member of President Reagan’s Economic Policy Advisory Board for both of his two terms. In March 1999, he was noted by Time Magazine as one of “the Century’s Greatest Minds” for his invention of the Laffer curve, which has been called one of “a few of the advances that powered this extraordinary century.” He has received many awards for his economic research, including two Graham and Dodd Awards from the Financial Analyst Federation. He graduated from Yale with a Bachelor’s degree in economics in 1963 and received both his MBA and Ph.D. in economics from Stanford University. Stephen Moore Stephen Moore joined The Wall Street Journal as a member of the editorial board and senior economics writer on May 31, 2005. He splits his time between Washington D.C. and New York, focusing on economic issues including budget, tax and monetary policy. Moore was previously the founder and former president of the Club for Growth, which raises money for political candidates who favor free-market economic policies. He left that position in 2004. Over the years, Moore has served as a senior economist on the Congressional Joint Economic Committee, as a budget expert for the Heritage Foundation, and as a senior economics fellow at the Cato Institute, where he published dozens of studies on federal and state tax and budget policy. He was a consultant to the National Economic Commission in 1987 and research director for President Reagan’s Commission on Privatization. Acknowledgements We wish to thank the following for making this publication possible: First we’d like to thank the Searle Freedom Trust and the JM Foundation for their generous fi nancial support for the research and promotion of this report. Next, we wish to thank Lori Roman, Jonathan Williams, and Josh Culling and the professional staff of ALEC for getting this published in a timely manner. We also appreciate the research assistance of Tyler Grimm, Ford Scudder, Jeff Thomson, and Allison Moore. Richard Vedder and Wayne Winegarden also provided us with a catalog of high-quality studies on the impact of immigrants on state economies. We hope that the research fi ndings help lead to the enactment of pro-growth economic policies in all 50 state capitals. Copyright © 2007 by the American Legislative Exchange Council. All Rights Reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system without the prior permission of the publisher. Published by American Legislative Exchange Council 1129 20th Street, N.W., Suite 500 Washington, D.C. 20036 4 Foreword Dear ALEC Member, Across America, the American Legislative Exchange Council (ALEC) continues to lead the way in bringing conservative, free-market policies to state legislatures. This publication is just another example of the vital, resourceful role ALEC plays in the public policy arena. Started in 1973, ALEC is the nation’s largest individual membership organization of state legislators with more than 2,400 members. Hundreds of ALEC members are chairmen or ranking members of committees and caucuses, and more than 100 hold legislative leadership positions in their respective states. Many former ALEC members serve today as sitting governors and members of Congress. ALEC’s eight national Task Forces provide a unique vehicle for legislators to communicate across state lines, share experiences and ideas, and work in unison with the private sector to create effective public policies. This book, Rich States/Poor States: ALEC-Laffer State Economic Competitiveness Index, was developed as a tool for state lawmakers to evaluate their state’s economic performance and to take action in order to strengthen it. In this time of choosing, ALEC is an indispensable resource to remind lawmakers the virtues of liberty and limited government. Over the years, ALEC has provided innovative ideas on tax and fi scal policy based on our Jeffersonian principles of free markets and individual liberty, which have proved to be successful in statehouses across the nation. The ALEC-Laffer State Economic Competitiveness Index will be an extremely valuable resource for those searching for state policy prescriptions. I am confi dent the ideas in this publication can lead to greater economic growth, prosperity, and freedom for our states, and most importantly, our fellow citizens. Sincerely, Lori Roman ALEC Executive Director American Legislative Exchange Council 2007 5 6 Executive Summary Rich States/Poor States: ALEC-Laffer State Economic Competitiveness Index his new publication by the American Legislative Section I introduces the 16 factors included in the ALEC- Exchange Council, Rich States/Poor States: ALEC- Laffer State Economic Competitiveness Index. The variables TLaffer State Economic Competitiveness Index, is an are as follows: invaluable resource for state lawmakers and citizens to evaluate their state’s fi scal and economic policies, while • Highest marginal personal income tax rate analyzing their results and ramifi cations. • Highest marginal corporate income tax rate • Progressivity of the personal income tax system Authors Arthur Laffer and Stephen Moore, two of the most • Property tax burden well-respected free-market economists in America, provide • Sales tax burden an in-depth analysis of policies, which foster economic • Tax burden from all remaining taxes growth and prosperity in one state and economic malaise • Estate tax/Inheritance tax (Yes or No) in another. This useful and insightful work is divided into • Recent Tax Policy Changes 2005-06 three sections, in addition to the State Competitiveness • Debt service as share of tax revenue Rankings. • Public employees per 10,000 residents • Quality of state legal system Section I: State Winners and Losers, details the migration • State minimum wage of thousands of Americans from areas with high tax • Workers’ Compensation costs burdens to places where they can experience greater • Right-to-work state (Yes or No) economic freedom. States with a high propensity to tax • Tax/Expenditure Limit and spend are fi nding their most wealthy and productive • Education Freedom Index citizens moving across borders into areas that impose less of a fi nancial burden. According to the authors, “they In Section II: The State Roadmap to Prosperity, the are voting with their feet for jobs and higher incomes— authors prove the economic theory that low taxes increase economic opportunities that are disappearing from some the incentive to work, and thus increase income, wealth, regions of the country while sprouting in others.” employment, investment, and in-migration. An in-depth look at the “Irish Miracle” proves this point. The decision It is telling that a state as beautiful as California has the in the 1990s to dismantle Ireland’s welfare state — cutting nation’s second-largest domestic population outfl ow. taxes and privatizing a variety of government services — Despite warm weather, sandy beaches and the Pacifi c Ocean, paid huge dividends as businesses and skilled workers Californians are leaving in droves to escape the state’s fl ocked to the country. It became one of Europe’s strongest oppressive tax burden. These former citizens are generally economies within a decade. According to Laffer and Moore, the “highest achievers and those with the most wealth, “The Irish are the Celtic Tiger of Europe and low tax capital, and entrepreneurial drive,” leaving the state much rates have played a critical role in this amazing economic less economically productive in their wake. Those arguing rehabilitation.” for higher taxes claim that taxation is necessary in order to redistribute wealth from the wealthy to the poor. However, Within Section II, the Laffer Curve further explains the according to Laffer and Moore, when the wealthy leave a adverse effects of high taxes. The principles behind the Laffer state with high taxes, this reduces the tax base and leaves Curve state that there is a point where any increase in taxes the state more hamstrung than before. Evidence of this is actually reduces tax revenue. Delaware, for example, actually taking place all over the country, as Americans are leaving makes an excess profi t, relative to its neighbors, on alcohol California and the New England states in record numbers, sales because of its extremely low beer taxes. This is yet preferring Southern states such as Florida, Georgia, and another example of consumers “voting with their feet” and Tennessee, as well as Western states such as Nevada, Idaho, opting to spend their money in states that will tax them less. and Wyoming. Finally, the authors conclude Section II with examinations American Legislative Exchange Council 2007 7 of regulation, debt, minimum wage laws, the cost of the states’ individual performances over the past 10 years.