The competition among the states is becoming more intense as businesses become more mobile. Toyota and Boeing are two high-profile employers in America that have crossed state borders because of the policy advantages of one state over another. Toyota moved from high-income-tax California to no-income-tax Texas, and Boeing, based in Washington, a forced-union state, opened a new plant in South Carolina, which has a right-to-work (RTW) law. Texas Governor Rick Perry and California Governor Jerry Brown have openly sparred in recent years about which state is more pro-business. Interstate competition allows governors and legislators to learn from each other about which policies create wealth and which policies diminish wealth inside their borders.
In recent years, governors have generally divided into two competing camps, which we call the “red state model” and the “blue state model,” raising the stakes in this interstate competition. The conservative red state model is predicated on low tax rates, right-to-work laws, light regulation, and pro-energy development policies. This policy strategy is now common in most of the Southern states and the more rural and mountain states. Meanwhile, the liberal blue state model is predominantly found in the Northeast, California, Illinois, Minnesota, and, until recently, Michigan and Ohio. The blue states have doubled down on policies that include high levels of government spending, high income tax rates on the rich, generous welfare benefits, forced-union requirements, super-minimum-wage laws, and restrictions on oil and gas drilling.
In no area are the effects of these competing models more evident than in tax policy changes of recent years. California, Connecticut, Hawaii, Illinois, Minnesota, New York, and Oregon have raised their income tax rates on “the rich” since 2008. In four of these states, the combined state and local income tax rate exceeds 10 percent, reaching 13.3 percent in California and 12.7 percent in New York. Meanwhile, the “red states” of Arizona, Arkansas, Kansas, Missouri, North Carolina, Oklahoma, and Idaho have cut their tax rates. This has widened the income tax differential between blue states and red states for businesses and upper-income families.
Similarly, red states such as Oklahoma, Texas, and North Dakota have embraced the oil and gas drilling revolution in America. Blue states such as New York, Vermont, Illinois, and California have resisted it. Blue states have raised their minimum wages; red states generally have not.
In this study, which is a summary of our recent book with Rex Sinquefield and Travis Brown, An Inquiry into the Nature and Causes of the Wealth of States: How Taxes, Energy, and Worker Freedom Will Change the Balance of Power Among States, we examine whether these policy differentials matter and, if so, by how much.
The answer is that the states’ policy choices on taxes, regulation, energy policy, labor laws, educational choice, and so forth have a large and in most cases a statistically significant impact on the prosperity of states over each 10-year time frame examined on a rolling basis from 1970 to 2012. There are always exceptions to the rule, but in most cases the red state model is substantially outperforming the blue state model.
We find in particular that two policies matter most. Right-to-work states substantially outperform non–right-to-work states, and states with no or low income taxes have a much better economic record than high-income-tax states…..