Recently, the American Legislative Exchange Council produced its 6th edition of the ALEC-Laffer State Economic Competitive Index. This study uses fifteen different policy variables to measure the economic competitiveness among the states. Some of these variables are: marginal personal and corporate tax rates, property and sales tax burden, estate taxes, recently legislated tax policy changes, public debt service as a share of tax revenue, quality of the state legal system, worker’s compensation costs, state minimum wage, right to work state, and tax or expenditure limits.
I find the study fascinating. The beauty of the American system is that states have a fair degree of autonomy to choose the best mix of policies for their own citizens. It is as if we have 50 different small “laboratories of democracy” that produce test results to see what works and what does not. The conclusion from the study is the states with growth as a primary objective continue to grow if they follow free market policies. States with redistribution and regulation as their main objectives continue to lose jobs and economic vitality if they continue with their policies. It seems there is a steady movement of human and investment capital from high tax, high regulation states to low tax, low regulation states. This has been occurring for decades.
The Dakotas fared extremely well in the economic performance and outlook. The economic performance is a backward-looking measure based on the states performance in three categories as listed below. Note that in each case a “1” is the best and a ranking of “50” is the worst.
North Dakota ranked first in state domestic product growth with a 110.9% increase. South Dakota ranked 12th with a growth rate of 59.1%. In absolute domestic migration cumulative from 2002-2011, North Dakota lost 4,367 people, ranking 30th in the nation. South Dakota gained 11,502 for a 27th rank. North Dakota topped the states in Non-Farm Payroll Growth of 22.2%. South Dakota came in 10th with a 7,7% increase.
Even though these results are impressive, the performance is more impressive considering that the majority of the growth in both states seems to have occurred since 2007. If one were to look at this over the past five years, the results are much higher.
As important as it is to look at the past, using present policies will be a good predictor of the future economic growth for the states. To do this, ALEC organized fifteen different variables and ranked the states accordingly. Both states fared well with the lowest top marginal personal income tax rate. South Dakota is one 9 states in the US with no personal income tax and North Dakota has the second lowest state personal tax rate at 3.99% as its top rate. Between 2001-2011, the 9 states without income tax have seen a 15% increase in population, a 63.5% increase in GDP, a 12.7% increase in non-farm payroll employment and a 76.3% increase in state and local tax revenue. Compare this to the 9 states with the highest personal income tax rates. There population growth was only 40 percent of the no-tax states at 6%, GDP only grew 45.3%, non-farm payroll rose a small 4.9% and state and local tax revenues grew at 47.9%. Clearly the economic growth trends favor those states with lower taxes.
On the corporate tax side, South Dakota comes in first with no corporate tax. North Dakota came in a 11th with a rate of 5.15%. North Dakota has the 10th smallest property tax burden at $25.30 per $1,000 of personal income. South Dakota was 17th at $29.65. Both states have higher than average sales taxes with North Dakota the 34th lowest in the nation and South Dakota at 43rd. The remaining tax burden is close to the median of the states with ND 31st and SD 27th. Neither state has estate taxes.
The states tend to manage their money well. Debt service as a percentage of state revenues is 5.9% in North Dakota, the 4th smallest in the nation. South Dakota is at 8%, the 21st lowest. Both states have a higher than average number of public employees per 10,000 residents with North Dakota the third largest in this category and South Dakota the 20th largest. Perhaps some of this may be due to the smaller populations in both states.
The states are friendly to business in that their score in the liability survey places them both in the top 10 of the country. Average workers comp costs are low with ND at $1.01, the lowest in the nation, and South Dakota at $1.91, the 28th lowest. Both states are right to work states.
Overall, the Dakotas fared extremely well again, with North Dakota with an Economic Outlook of 2nd best in the nation and South Dakota at 3rd best. North Dakota has seen a steady climb in this index with the state increasing from 18th in 2008 to where it is today. South Dakota has ranked between 2nd and 5th in the economic outlook over the past six years.
It is also interesting to see how the states that surround the Dakotas: Montana, Wyoming, Nebraska, Iowa, and Minnesota fared in the study. Montana ranked 9th in economic performance but a dismal 42nd in the economic outlook category with additional regulations and burdensome requirements on business there. The Bakken boom that is driving much growth in North Dakota is a mere trickle in Montana. Minnesota ranked 34th in economic performance and 46th in the economic outlook. High taxes and increased regulations are forcing businesses there to assess their location. Iowa ranked 25th in both categories. Nebraska ranked 21st in performance and 37th in economic outlook. The legislature there is considering lowering tax rates which will improve the economic outlook there. The best performing state contiguous to the Dakotas is Wyoming, with a ranking of 4th best in each category.
None of our neighbors, with the exception of Wyoming are close to the rankings of either North or South Dakota. The lesson from the study is that a state with a low tax and regulatory burden is more attractive for a business to open its doors and operate in. These opportunities create more jobs and hence, more wealth for that state’s citizenry. We are truly blessed to live in wonderful states that have a pro-growth mindset coupled with abundant natural resources and hard-working people. The future for the Dakotas is bright!--Phil Love