Tennessee's relatively low tax rate helped the state outperform the country in its economic growth over the past decade, according to a new conservative study that ranks Tennessee as one of the top states for its economic outlook.
From 2007 to 2017, Tennessee's overall economy as measured by its gross domestic product grew by 43.1 percent — the seventh fastest of any U.S. state and above the national average in all but two of the 10 years. The Volunteer State also added a net 235,494 persons from domestic migration — the 9th highest of any state — and grew payroll employment by 8 percent to rank 13th among the states.
Top states for economic outlook
Based upon the limited tax and regulation goals of the conservative American Legislative Exchange Council, the top U.S. states are:
3. North Dakota
6. North Carolina
9. South Dakota
Source: American Legislative Exchange Council. Georgia ranked No. 18 and Alabama ranked No. 21.
A new study by the conservative American Legislative Exchange Council credits Tennessee's relatively low tax rates and right-to-work labor policy for much of those gains. Tennessee is one of nine states that does not have a personal income tax and is phasing out its tax on inheritance and unearned income. Despite having the ninth highest sales tax burden, and an average tax on corporate income, Tennessee still boasts the fifth lowest average property tax rate of any state and fewest government workers for its size than most states.
Arthur Laffer, the leading "supply-side" economist who backed President Ronald Reagan's tax cuts in the 1980s, said the ALEC rating for "Rich States, Poor States," rate state government policies and taxes "that really do line up with future performance.
"There is a lot of variation between the state, but this is a very important index and it does lead to very predictable returns," said Laffer, who relocated to Tennessee from his original home in California in 2006. "If you look at the 11 states that have introduced a state income tax since 1960, they are continuously in the bottom performance of all states. The nine states that don't have a personal income tax (including Tennessee) do pretty darn good year in and year out."
Jonathan Williams, chief economist of the American Legislative Exchange Council, said the tax reform package approved by Congress in 2017 "was a game changer" with the elimination of the deductibility of state and local tax payments.
"We've seen many states, in response, go down the direction of trying to make their own states more competitive through state tax reform, after the federal tax reform," he said.
ALEC bases its rankings on 15 tax, regulation, labor policy and other business measurements the report says are linked to economic growth.
"We know from the academic literature and economics that these factors matter to economic growth, job creation and new migration," Dan Reynolds, a spokesman for ALEC said. "Every one of the state ranking measurements we use are things that state Legislatures can control."
In the ALEC ranking, Utah was No. 1 and New York ranked at the bottom, primarily due to the outmigration of nearly 1 million New Yorkers to other states from 2007 to 2017. Utah has benefitted by its relatively low tax rates, pension reforms and easier government regulations, but Laffer said another key reason for its success is the outmigration from neighboring California with its higher taxes and stricter regulations.
But the report shows New York still outpaced Utah in the rate of GDP growth measured over a 10-year period between 2007 and 2017. By that metric, New York ranked third while Utah ranked fifth.
Laffer also was critical of California, which has lost nearly 800,000 residents to outmigration in the past decade. Laffer said his native California "is like a super nova and it sends off of its economic solar systems to nearby states like Utah, Nevada and Idaho," each of which ranked among the top 10 states in the ALEC analysis.
"This migration directly influences the economic and political makeup of states," Williams said, adding that Americans are voting with their feet. "They are voting strongly in favor of the states that have created a free market environment conducive to economic growth and opportunity."
But California's GDP growth ranked No. 8 in the period studied with a 43 percent growth in GDP from 2007 to 2017.
Florida, which enjoyed an influx of domestic migration and ranked No. 8 in the ALEC study, still ranked No. 33 in economic growth from 2007 to 2017.
Contact Dave Flessner at email@example.com or at 757-6340