Michigan Needs to Become Freer to Become Richer

A study released today by the Pacific Research Institute for Public Policy in San Francisco ranks Michigan 34th among the 50 states in terms of economic liberty. This is not good news. The study’s findings strongly confirm other data that show Michigan lagging the country in economic climate and performance — a point the governor and the Legislature should keep firmly in mind as they prepare for next year’s legislative session.

The Pacific Research Institute is a nonprofit, nonpartisan research organization. Its study, “The U.S. Economic Freedom Index: 2004 Report,” ranked each state according to five broad categories and 143 variables collected from 1995 to 2003. The categories included fiscal policy, regulation, judicial quality, government size and welfare policy. The variables included such features as taxation, property rights protection and the existence of “right-to-work” laws, with the Institute’s model favoring lower taxes, strong property rights and freedom from labor union compulsion.

Among the 50 states, Kansas, Colorado and Virginia had the highest degree of economic freedom, while California and New York rounded out the bottom. Michigan was ranked high for the quality of its judiciary (first), but it ranked much lower for such categories as fiscal policy (38th) and the size of government (29th), producing the state’s overall ranking of 34th.

Michigan’s lack of freedom matters. The PRI study demonstrates a statistically significant relationship between higher rankings on its economic freedom index and higher state per-capita income. In other words, the findings strongly suggest that Michigan’s lack of economic liberty is depressing the income of Michigan citizens — an estimated average decrease of $1,899 per capita in the year 2000, according to the study. Given Michigan’s state income, this amounts to an “oppression tax” of 7.04 percent, eighth highest in the nation.

The PRI study is not the only one to take a negative view of Michigan’s economic climate. A well-known state index produced by the Washington D.C.-based Tax Foundation recently ranked Michigan 36th of the 50 states in the quality of its business tax climate. We placed 50th — dead last — when corporate taxes were considered alone.

None of these findings should surprise even the most casual observer of Michigan’s economic landscape. The Mackinac Center recently published three vital metrics of Michigan’s economic health since 1995. The years for these statistics were chosen because they not only include an expansion and contraction of the economy, but begin when state government ramped up its centrally planned economic development efforts.

• Between December 1995 and December 2003, Michigan finished 51st among the 50 states and the District of Columbia in employment growth, with a total of just 1.4 percent new jobs created.

• Between 1995 and 2001, Michigan dropped from 23rd to 30th among the 50 states in per-capita gross state product.

• Between 1995 and 2003, Michigan finished 49th among the 50 states and the District of Columbia in per-capita income growth.

The Granholm administration and the Legislature should recognize the importance of these data as they prepare for next year’s legislative session. With an expected fiscal 2006 budget deficit waiting in the wings, and with tax reform on the table, officials in Lansing may be tempted to raise taxes to close the gap between spending and revenue. They might also repeat their past error of appeasing the business community by creating more selective tax credits and subsidies for high-profile, well-connected or otherwise successful businesses.

But the figures above show that these “development” measures programs have not helped the economy, and hiking taxes to balance the budget will only drive more capital — both financial and human — away from the state. Simply reaching deeper into the pockets of Michigan taxpayers is not the solution; it is the problem.

As the studies by PRI and the Tax Foundation suggest, state officials should address the state’s precarious economic health by cutting taxes and regulations for all state businesses and citizens, while reducing state spending to balance the budget and remove the pressure for future tax hikes. It is past time to expand Michigan’s economic liberty and welcome new people and opportunities to the state.

Michael D. LaFaive and Laura J. Davis are, respectively, director of fiscal policy and research assistant at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the authors and the Center are properly cited.