When it comes to rankings of economic performance, Florida and Texas tend to rank at or near the top. Not coincidentally, they also tend to rank at or near the top on various lists of pro-growth economic policies. My recent report for the Los Angeles-based Reason Foundation provides yet another example of such a list.
The “U.S. Metropolitan Area Economic Freedom Index” uses nine different measures of state and local government policies across three broad areas (taxes, spending, and labor market restrictions) to produce an overall score for each of the nation’s 382 large metropolitan statistical areas (MSAs). Four of the top five and eight of the top ten MSAs are in Florida or Texas. Eight of the ten least-free are in California, New York or Ohio.
One of the big advantages of Florida’s (and Texas’) metro areas is that there is no state income tax, but that alone is not enough. Washington and Nevada also have no income tax, but Seattle and Las Vegas rank far below Florida’s four large metro areas (32nd and 36th out of 52, compared to 2nd, 3rd, 7th, and 9th). The difference is that the other state and local taxes in Florida are kept low enough to enable those areas to keep spending relatively low as well.
Hundreds of research articles over the years have examined the relationship between the various measures of economic freedom and a whole host of positive economic outcomes. The overwhelming majority have found that freer areas tend to have better outcomes.
At the local level, the most-free quartile (25 percent) of metro areas saw their population grow four times faster (over the most recent four years) than the least-free quartile. Per capita income was 5.7 percent above the MSA average in those freest areas, but 4.9 percent below average in the least-free areas.
As a result, living in one of the least-free areas amounts to taking an 11 percent pay cut compared to living in one of the most-free areas. The slower population growth there also creates a more stagnant economy with fewer economic opportunities for all.
While Florida’s policies and economies are notably good, it should be clear that there is always room for improvement. For example, in Florida, the growth of state and local government spending is higher than it needs to be. Also, Florida is alone in the Southeastern seaboard states in having a minimum wage higher than the federal level.
Our findings imply that the policy recipe for a healthy local economy should include three key ingredients: maintaining fiscal discipline by slowing spending growth; reducing or eliminating income taxes (and keeping other taxes low); and reducing labor market interventions such as minimum wages. Areas with such policies tend to have more vibrant economies, which creates more economic opportunities for all.
1) Houston, TX, 8.00
2) Jacksonville, FL, 7.92
3) Tampa-St. Petersburg, FL, 7.88
4) Richmond, VA, 7.81
1) Riverside, CA, 5.23
2) Rochester, NY, 5.38
3) Buffalo, NY, 5.41
4) New York City, NY, 5.44
5) Cleveland, OH, 5.68
6) Columbus, OH, 5.94
7) Portland, OR, 5.95
8) Sacramento, CA, 6.01
9) Providence, RI, 6.03
10) Los Angeles, CA, 6.14
Dean Stansel, a fifth generation Florida native, is an economist at the O’Neil Center for Global Markets and Freedom in Southern Methodist University’s Cox School of Business in Dallas, and the author of the Reason Foundation’s new “U.S. Metropolitan Area Economic Freedom Index.”