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Soundings

Steven Malanga
Tyrannous Taxation
New York State’s business climate is the nation’s worst.
Winter 2005

Mired in recession in 2003, New York State raised taxes by $5.4 billion—and that came on top of a $1.8 billion New York City tax hike, described by Mayor Michael Bloomberg as part of the cost of doing business in a “premium” place like Gotham. Meanwhile, Kansas got through its recession-induced budget woes without raising taxes; instead, it cut spending and passed productivity reforms that saved $1 billion.

The stark contrast between those two budgetary approaches helps explain why a new Pacific Research Institute and Forbes magazine survey praises Kansas as the state with the nation’s best business climate and rates “premium” New York as the worst. The study measured the “economic freedom” of states, defined as “the right of an individual to keep what he earns, produce what he wants, and compete in . . . markets of his choosing.” The economies of freer states prosper from the choices that individuals and businesses make with their own money; economically unfree states turn more money over to the government, which invariably uses it less efficiently and productively than the market does.

New York scored at or near the bottom in almost every one of the study’s indicators of economic freedom. It has the biggest government and spends the most on welfare programs of any state, for instance—largesse it supports by levying sky-high taxes. It also has one of the most highly regulated business environments in the U.S. The overall result is an “oppression tax,” the researchers say, that reduces New Yorkers’ earning power by about $2,400 per capita annually—a $45 billion annual penalty to the state economy.

Less economic freedom means fewer jobs. Since the late 1950s, when it embarked on its big-government path, New York has consistently lagged behind the national economy and the economies of fast-growing states like Kansas in producing new employment (Kansas’s rate of job growth has nearly tripled New York’s). If its economy had grown at merely the national average over that period, New York would have roughly 4.5 million more jobs than it does today. The only consolation New Yorkers can take from the study is that nearby states are just as toxic to business. Joining the Empire State near the bottom of the freedom index are Connecticut (48), Pennsylvania (45), New Jersey (42), and Massachusetts (41).

Revealingly, a map of the U.S. color-coded by how states rank in economic freedom would look much like today’s political map. The Blue states that went heavily Democratic—in the Northeast, industrial Midwest, and California—all score low on economic freedom. The Red states of the South and the Central Plains rank highest.

People and businesses have been fleeing the Blue states for economically freer climes, leading to lost congressional seats. The two bottom states on the economic-freedom index, New York and California, also showed the greatest net loss of domestic residents in the last census. As long as people can pursue their economic interests by going where the opportunity is, that drain will continue.

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