The States Are Growing—but Not for the Same Reasons

Originally published on Substack. 

​Every state grew. National real GDP rose at a 4.4 percent annual rate. Personal income increased across all 50 states. If you stopped there, you might think the economy is finally moving in the same direction everywhere.

But that’s not what the data show. After digging into the latest state GDP and personal income release, a very different picture emerges.

Growth is happening, but not evenly, and not for the same reasons. Some states are growing because people are producing more and earning more. Others are growing because government spending and transfer payments are doing more of the work.

That difference matters.

Real GDP measures inflation-adjusted production within a state. Personal income measures what residents actually receive, including wages, business income, investment income, and government transfers.

When GDP growth is strong but income growth is weak, rising costs may be offsetting gains. When income growth is driven more by transfers than earnings, growth is less durable.

Those dynamics are everywhere in this report.

Take Kansas, which quietly posted the strongest quarter in the country. Real GDP grew at 6.5 percent, the fastest among all states. Personal income rose 6.3 percent, also the highest. Agriculture led output growth, and manufacturing played a major role. Just as important, income gains came largely from earnings, not government checks.

That’s the kind of growth that compounds. When people earn more by producing more, they invest, hire, and expand. It’s not flashy, but it lasts.

Now compare that with Louisiana. Louisiana’s economy grew 3.5 percent, close to the national average. But personal income increased just 0.1 percent, the weakest showing in the country. The reason is revealing. Transfer receipts fell sharply, exposing how much recent income growth depended on government payments rather than private-sector earnings. When transfers slow, there’s very little underneath to keep incomes rising.

Texas lands in between. Real GDP grew 4.2 percent, a solid performance for a large, diverse economy. Texas continues to benefit from no personal income tax and relatively flexible labor markets, which helped fuel job growth over the past several years, according to state employment data. But personal income growth came in at just 2.6 percent, below the national average. Rising state and local spending, along with high property taxes and corporate welfare, are starting to show up in the data. Economic freedom built the Texas model. It doesn’t disappear overnight, but it can erode quietly.

Florida tells a similar story. Florida’s economy grew 3.5 percent, and personal income rose 3.2 percent. Migration still supports growth, but spending expanded rapidly during the boom years. Growth can hide fiscal drift for a while. Relative performance eventually reflects it.

Tennessee reinforces the broader pattern. With no personal income tax and a long-standing emphasis on labor-market flexibility, Tennessee continues to rank near the top in long-run measures of economic freedom.

States like Tennessee tend to grow by attracting people and investment, not by expanding government programs.

Now look at the more progressive states.

California posted 4.5 percent GDP growth, which sounds impressive until you consider context. Personal income grew 3.7 percent, and the state continues to lose residents to other states. High taxes, high housing costs, and heavy regulation push people and businesses away even during periods of growth.

New York also grew 4.5 percent, but income gains leaned heavily on transfer payments, which rose by double digits. That’s not a sign of economic strength. It’s a sign that government spending is doing more of the work than private earnings.

Illinois and Minnesota show similar patterns. Minnesota’s GDP grew 2.7 percent, well below the national average, despite aggressive spending and high taxes. Illinois continues to struggle with slow population growth and fiscal pressure even when output rises modestly.

Another important detail from this release is what’s driving income growth nationally. Earnings rose 3.6 percent, while transfer receipts rose 5.1 percent. In states where income growth depends more on transfers than work, growth is more vulnerable when budgets tighten or federal support slows.

This aligns closely with decades of research on economic freedom States that restrain spending, keep taxes predictable, and allow markets to adjust tend to experience stronger, more durable growth. States that rely more heavily on government spending can still grow, but that growth is often thinner and less resilient.

Milton Friedman once warned that government can delay economic consequences but cannot eliminate them. Thomas Sowell has made the same point more bluntly: policies are judged by what they do, not what they promise.

The third-quarter data make that lesson tangible. Growth driven by production and earnings lasts. Growth driven by transfers and spending does not.

Key Takeaways

• All states grew in Q3 2025, but growth quality differed sharply
• Kansas led in both GDP and income growth, driven mainly by earnings
• Texas and Florida remain strong but show signs of slowing momentum
• Progressive states rely more on transfers and face weaker incentives
• Economic freedom shapes not just growth, but how durable it is

Closing Thoughts

The third-quarter numbers don’t tell us where states hope to go. They tell us where policies have already helped out hurt.
People respond to incentives. Businesses invest where costs are lower and rules are clearer. Workers earn more where effort pays off.

That’s not ideology.

That’s behavior.
​
And once again, the data make it clear where growth is really coming from.