After Election Season, Economic Liberty Please

Lesson from a state-by-state study: Liberty promotes prosperity

The economic well-being of the people in a state is encouraged or hindered by the laws and policies that their legislature and governor enact. Each election brings a new set of officials who have a chance to reset the ways that government affects the economy. Given that, it’s prudent to remind the officials who will take office in January what policies have been shown by history to promote economic liberty and in turn, prosperity.

One valuable measure of economic liberty is produced by the Canada-based Fraser Institute and titled “Economic Freedom of North America.” This report ranks American and Mexican states as well as Canadian provinces in terms of economic freedom. Fraser’s newest report is due out next month so this is a good time to review where Michigan was and is in absolute terms, where we are relative to competing states and where we should go from here.

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The 2015 report ranks Michigan 27th out of the 50 states. That’s a middling rank, though it has at least improved since 2010 when we were ranked 40th. Midwest sister states Illinois, Wisconsin and Ohio all ranked below Michigan at 33rd, 38th and 40th, respectively. Indiana bested all Midwestern states by a significant margin, ranking 18th overall.

The index is built around information in three major categories: spending by governments, the type and level of taxes, and laws and public policies about labor. The categories have a total of 10 variables attached to them, such as the amount government spends compared to the personal income of its citizens, the highest income tax rate and minimum wage laws. Each variable is given a score from 0 to 10, with 10 representing the highest amount of liberty and zero the least. The score for each category is then the average score of each of its variables.

According to objective statistics, economic liberty and human well-being tend to go hand-in-hand. So the index the Fraser report created can show Michigan residents how well they are doing compared to people who live elsewhere.

Experience suggests that if Michigan appears high in the rankings, its people will grow wealthy and have many opportunities. Take a look at the states and provinces that scored in the bottom 25 percent for liberty. In the 2013 report, their per capita personal income was 7.7 percent below the average of all provinces and states. On the other hand, income in the places that ranked in the top 25 percent for liberty was 6.7 percent above the average. It’s unlikely that the difference in income for those two groups was caused by mere coincidence.

The index also tells policymakers where their state or province is weak, so it should be required reading for everyone who has the power to change government policy.

According to the 2015 Economic Freedom Index of North America (which uses data through 2013), Michigan scored a 6.6 out of 10 in government spending, a 6.9 for its tax policies and a 6.8 in labor market freedom.

Michigan’s ranking in the three categories and the 10 different variables within them suggests that the Great Lake State is not a leader or laggard in any key policy area. It ranks high at 8.0 for its low “top income tax rate” but Ohio and Indiana scored likewise. Conversely, the state ranks low in the “insurance & retirement payments as a percent of personal income,” which measures the taxpayers’ obligations to state and local government workers. Michigan scored a 5.0, but Ohio, Illinois and Wisconsin all ranked lower, meaning Michigan is not as hampered in this area as much as some of its neighbors.

One area where the Great Lake State could make relatively easy and marked improvement in is the variable of “income tax and payroll revenue as a percent of personal income.” Currently Michigan has a score of just 6.0. This is the best score among sister states but it should be much better.

In 2007 Gov. Granholm and the Michigan Legislature approved a “temporary” personal income tax hike of 11.5 percent. It was supposed to be rolled back by 0.1 percent a year, starting in 2011 and ending in 2015 at 3.9 percent. But Snyder and the Legislature scrapped this mandate after letting a single cut of one-tenth of a percentage point take place. Michigan workers are still owed a personal income tax cut.

Rolling the state income tax rate back to 3.9 percent, if not taking it even lower, would go a long way to spurring economic growth, too. Ultimately, Michigan’s personal income tax rate ought to be rolled back to zero.

The Economic Freedom Index of North America makes for a useful policy guide. It is not only chock-a-block with useful, very transparent data, but its rankings correlate highly with widely popular measurements, such as growth in personal income.

Lansing politicians would be wise to review its findings and act accordingly.

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