Mercatus Rankings Confirm Again: Low Tax States Do Better

Jul 7, 2015 by AFP

By Akash Chougule

Yet another study has confirmed what we already knew – states with lower taxes do better. Today, the Mercatus Center at George Mason University unveiled its latest report, “Ranking the States by Fiscal Condition.”  The report ranks states on their overall financial health, and then assesses each in a variety of categories regarding states’ ability to pay their bills.

Overall, the rankings provide more evidence that economic freedom works, and bigger government means bigger trouble.

The top five states for overall fiscal solvency are Alaska, North Dakota, South Dakota, Nebraska, and Florida. Alaska, South Dakota, and Florida each have no state income tax and are also ranked in the top five of the Tax Foundation’s State Business Tax Climate Index.

Other low-tax states that lead the way in tax climate also scored well on fiscal solvency. Wyoming has no income tax and ranked number one in state business tax climate, and also ranked 6th in fiscal solvency. Similarly, Tennessee has no individual income tax and ranked 8th in fiscal solvency. The trend of low-tax states demonstrating strong fiscal solvency is apparent throughout.

On the other hand, the usual suspects found themselves at the bottom of the rankings once again. The worst states for overall fiscal solvency are Illinois, New Jersey, Massachusetts, Connecticut, and New York. These states are defined by reckless government spending, high taxes, billions in unfunded liabilities – and also rampant out-migration of people leaving for greener pastures. Perhaps unsurprisingly, New Jersey, Connecticut, and New York also rank in the bottom five of the State Business Tax Climate. Another perennial cellar dweller, California (which ranks 48th for business tax climate) is 44th in fiscal solvency.

The Mercatus report also assesses states in five more specific categories: cash solvency (ability to cover short-term liabilities), budget solvency (fiscal year revenues versus expenses), long-run solvency (long-term liabilities compared to total assets and per capita), service-level solvency (ability to increase spending if necessary), and trust fund solvency (unfunded liabilities and state debt versus personal income). Mercatus senior research fellow Eileen Norcross walks through the report in a helpful video, which can be found here.

Of note is the variety of public policy decisions that affect a state’s fiscal health and their strength in the various categories. For example, the vast majority of states continue to have massive oncoming crises in the form of unfunded liabilities. But one exception is Wisconsin, whose strong trust fund solvency can be attributed to recent reforms enacted under Governor Scott Walker. “Act 10,” the controversial budget repair bill from 2011, significantly reformed state spending and strengthened long-term fiscal health by essentially ending collective bargaining for government employees. Wisconsin now has the best-funded pension system in the country. Meanwhile, their neighbor to the south, Illinois, has perhaps the worst oncoming fiscal crises in the country in the form of unfunded liabilities, a result of decades of reckless spending and overly generous public employee benefit guarantees arranged by powerful government unions.

Other policy decisions that have and will continue to affect state fiscal health are energy and healthcare. For example, states that have benefited from fracking and the American energy revolution like South Dakota have enjoyed huge influxes of revenue and thus greater fiscal health, without raising taxes. On the other hand, states that accepted Obamacare’s Medicaid expansion may find themselves with much larger bills to pay for the program in the future, when federal funding is trimmed.

Overall, the message remains clear – states that maintain low competitive tax rates and responsibly low levels of government spending are best equipped to pay their bills. These states attract more businesses and thus more people, creating greater economic growth and tax revenue. In addition, stronger economic growth means less spending on welfare programs.

Conversely, states that continue down the path of bigger, more expensive government find themselves less and less able to meet their own needs. Over-promising and under-delivering will soon turn into a crisis in these states as they drive out taxpayers and businesses, but continue to promise greater spending and more handouts for those that remain.

Former Supreme Court Justice Louis Brandeis called the states America’s “laboratories of democracy,” and the Mercatus Center’s new state fiscal condition rankings demonstrate that the experiment of limited government has worked best, while high taxes and reckless spending has failed.