Michigan's Tax Burden Compared

A famous Frenchman, Baron de Montesquieu, once observed that, "Countries are well cultivated, not as they are fertile, but as they are free."

Recently, the 1999 Index of Economic Freedom published by The Heritage Foundation and the Wall Street Journal examined 161 countries and came to the same conclusion: "Countries that have the most economic freedom also tend to have higher rates of long-term economic growth and are more prosperous than those that have less economic freedom." Unequivocally, the numbers show that "countries with the lowest levels of economic freedom also have the lowest standards of living."

Progress has been made in recent months with the enactment of more tax cuts. Still, 26 states are ranked economically freer than Michigan.

One would expect that within a country, the same pattern would be evident. Indeed it is, and now we have a comprehensive analysis that proves it: Economic Freedom in America's 50 States by economists John Byars, Robert McCormick and Bruce Yandle. Commissioned by the State Policy Network, a trade association of research groups including Michigan's Mackinac Center for Public Policy, the report argues that "states with relatively more economic freedom enjoy higher rates of growth . . . because individuals in those states are allowed to keep more of their income, and thus the marketplace can more efficiently determine the allocation of resources."

The Byars, McCormick, and Yandle report (hereafter referred to as BMY) assembles data on more than 200 indicators and groups the resulting measurements under five key categories: Fiscal, Regulatory, Judicial, Government Size, and Welfare Spending. Each state is then assigned an Economic Freedom rank, from 1 to 50. Idaho turned in the best score as the state with the greatest degree of economic freedom, while New York came in dead last. The five states with the most economic freedom (Idaho, Virginia, Utah, Wyoming, and South Dakota) boasted growth in personal income from 1990 to 1997 that was a spectacular 59 percent higher on average than the five states with the lowest levels of economic freedom (New York, Rhode Island, New Jersey, Massachusetts, and Connecticut).

Just as human traffic around the world tends to move from the less free to the more free countries, migration patterns within the U. S. show similar movement. BMY confirms that "people are moving into states with high levels of freedom and out of states with low freedom." The difference in population growth between the top and bottom ends of the freedom scale is especially dramatic: Idaho—the freest state—saw its population soar by 16.8 percent from 1990 to 1997, where New York—the least free state—barely held its own with a paltry growth rate of just 0.8 percent.

BMY shows that on a per capita basis, residents of New York pay twice the state and local taxes as do residents of Idaho: $3,858 versus $1,955. Meantime, the unemployment rate in Idaho was 3.7 percent below the national average in 1996, while New York's was 15 percent above. In the 1990s, both per capita income and gross state product boomed in Idaho at almost twice the respective rates of New York.

Where is Michigan in the economic freedom ranking? In the middle of the pack, at 27th among the 50 states. We have undoubtedly made some progress in recent months with the enactment of more tax cuts, and the Engler administration rightfully boasts of its successes in making Michigan more friendly to business and growth. Still, 26 states were ranked economically freer than Michigan. Among our neighboring states, only Indiana's rank of 22 was better: Ohio was 33rd, Illinois was 36th, Wisconsin was 37th and Minnesota was 43rd. When compared to all the states, clearly much more can be done to make Michigan a better place to live, raise children, and earn a living.

Here is where Michigan fared poorly: According to the report, we had the 11th highest state and local taxes as a percentage of personal income. We sue each other too much and pay high liability insurance premiums because of it, ranking 15th among the states in overall litigiousness. We are a leader in cutting welfare caseloads, but 31 states spend less per capita on welfare than we do.

There are profound lessons here for state governments. Their actions and policies can and do make a dramatic difference in the material welfare of their citizens.

Byars, McCormick, and Yandle have done us a favor by proving beyond a shadow of a doubt what America's Founders knew and what we must all learn again today: Freedom works, and more of it works even better.

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(Lawrence W. Reed is president of the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Michigan. More information on economic policy is available at www.mackinac.org. Permission to reprint in whole or in part is hereby granted, provided the author and his affiliation are cited.)

Summary
A recent report ranked the 50 states according to how much economic freedom each government allows its citizens to enjoy. At 27th, Michigan can do more to make itself a freer and better place to live, rear children, and earn a living.
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