The Fraser Institute’s recently released annual report on economic freedom in North America shows that Texas continues as one of the most free jurisdictions in the nation and continent in 2014. Specifically, Texas retained its third place status in the U.S. for the sixth straight year while improving to fourth place when including jurisdictions in Mexico and Canada.
Because of its positive relationship with measures of standards of living, this economic freedom measure serves as a valuable guide for states to use when designing policy.
Individuals are said to have economic freedom when:
(a) Property they acquire without the use of force, fraud, or theft is protected from physical invasions by others; and
(b) They are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others.
This essentially calls for less government manipulation of markets to allow voluntary exchange between buyers and sellers to satisfy their desires. Data indicate that high levels of economic freedom result in economic success among businesses and families, including those in poverty.
When compared with state economies of similar stature, the Texas model of low taxes, no personal income tax, relatively restrained government spending, and stable regulation leads the way. California, the only state with an economy larger than Texas, ranks an abysmal 49thin economic freedom, outranking only New York—the country’s third largest economy.
New York and California have placed burdens on their citizens with high personal income and business taxes as well as forcing many workers in unions instead of encouraging individual choice. California and New York’s low rankings in these categories and their overall tepid scoring in government spending and market regulation question the hands-on governing approach.
Meanwhile, Texas continues to enjoy superior rankings across most metrics thanks, in part, to the passage of a conservative budget that limits increases in government spending to no more increases in population growth plus inflation. However, Texas still has room for improvement to surpass New Hampshire and Florida.
Texas’ most critical rating is that of “sales tax revenue as a percentage of income,” which includes both sales and gross receipt taxes. Contributing to the state’s poor scoring is the onerous gross receipts-style business franchise tax. Putting this tax on a path to elimination in the upcoming legislative session would likely result in a major improvement in economic freedom and help generate more economic prosperity.
Additionally, Texas must not fall prey to the temptations of raising the minimum wage, which is a labor market regulation. The authors of the report note that their minimum wage “component measures the annual income earned by someone working full time at the minimum wage as a percentage of per-capita income.” Given that Texas has a low cost of living, a higher minimum wage hurts low-skilled workers and those near the minimum wage much more than in more expensive states.
While Texas’ high level of economic freedom should be celebrated, the Fraser Institute’s report provides a valuable guide for simple steps to take this session to further improve Texans’ well-being.
Ph.D. Economist at the Texas Public Policy Foundation. Blog posts are publications by the author.