State Policies Impact Prosperity: Jonathan Williams on American Radio Journal

In the states, the 50 laboratories of democracy experiments play out to show Americans how different policy decisions can affect prosperity. We can observe which states grow and which states shrink, and how Americans vote with their feet, moving to the states that provide greater economic opportunity.

As we commemorate the 250th anniversary of our independence as a nation, this is exactly the sort of discussion around federalism that our founders made possible.

One of the clearest experiments has played out in tax policies across the states. States embracing low taxes, especially the states without personal income taxes, have been engines for growth and upward economic mobility.

We rightly hear much about the stark differences between large states like California versus Texas or New York versus Florida, but there are many more of these comparisons that are worth examining. One of these experiments plays out in the comparison between Missouri and Tennessee. Let’s call it a tale of two states. These two similarly sized and located states showcase vastly different public policies and have realized substantially different economic fortunes.

Tennessee is known as one of the big economic success stories of the early 21st century, and according to our Rich States, Poor States report, the Volunteer State ranked second best in the nation for its economic outlook. Today, it is one of the eight states that currently have no personal income tax altogether.

Tennessee’s competitiveness, though, has especially taken off since 2016, when it repealed a tax on interest and dividends, the so-called Hall income tax, as well as its inheritance tax, the death tax. Tennessee’s free market policy environment has attracted people and investment, allowing businesses to grow and letting workers keep more of what they earn. Property tax burdens, too, are among the lowest in the nation.

Missouri has taken a different course. The state has a progressive personal income tax with a top rate that was 6% up until 2016. When you add the 1% additional taxes imposed by Kansas City and the City of St. Louis, those in those two major cities were paying combined income taxes of 7%.

Missouri also lacks right-to-work protections, policies that guarantee workers a choice in whether they join unions. Missouri has made some progress on tax policy in recent years, such as income tax rate reductions and an elimination of the state’s capital gains tax, and those have helped strengthen its competitiveness. Unfortunately, it has not been adequate for the state to keep up with Tennessee and some of the top-performing states.

The Show Me State’s top combined state and local income tax rate is 5.7%, a rate high enough to put it in the top half of states. Remember, the income tax is the price states set for work, savings, and investment.

If we compare Missouri and Tennessee, we’ll see that, as recently as 1998, their populations were about the same. In that year, the median income in Missouri was about 18% higher than that in Tennessee. But since then, the states have been on different trajectories, as more competitive policies in Tennessee have allowed it to catch up.

Tennessee has grown rapidly, attracting businesses, investment, and residents from other states. Net domestic migration into Tennessee since 1998 has totaled nearly 1.2 million, or about nine times as many people as moved into Missouri over the same period. In fact, in the 2010s, Missouri actually saw a wave of out-migration to other states.

Thanks to this migration gain in Tennessee, it now has more than a million more residents than Missouri and a GDP about 25% higher today.

So, what has all this growth meant for the people and the economy in Tennessee? Well, through competitive policies and the free market, the state has created jobs and prosperity across the board.

In 1998, we might have said that Tennessee was lagging behind in comparison to Missouri. Its economy was smaller, and incomes were lower. But in less than three decades, Tennessee has become an incredible competitor. Its economy has grown much larger, and the income gap has been almost entirely eliminated. It has delivered prosperity by getting government out of the way and letting businesses and workers keep more of what they earn.

Today, it is Missouri that unfortunately has fallen behind.

If the Show Me State wants to stem the tide of losses to states like Tennessee in coming years, some healthy introspection is in order to close this gap on public policy choices that matter for economic growth and prosperity by following Tennessee’s lead. Missouri can turn things around and deliver more economic opportunity for all.