ALEC’s Flagship Guide to Economic Growth: Rich States, Poor States

"People go to where they have more freedom, to where they have a better chance of economic prosperity."

For nearly 16 years, Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index has been a guiding light for legislators to help improve their state’s Economic Outlook. Chronicling how economic policy can cause Americans to “vote with their feet” has provided lawmakers with the evidence and arguments necessary to pursue free market policy solutions.

Our second episode in the ALEC 50th Anniversary video series features co-authors Dr. Arthur B. Laffer, Stephen Moore and Jonathan Williams, as well as free market champion Philip Gunn (Mississippi Speaker of the House and ALEC 2020 National Chairman), discussing the origins and impact of 16 years of Rich States, Poor States.

In the aftermath of the 2008 financial crisis, states were looking to tax increases as the solution to their budget woes as opposed to cutting spending. At the time, economists Dr. Arthur B. Laffer and Stephen Moore approached ALEC with the idea of building a tool that state legislators could use to implement pro-growth, free market policy solutions. The result was Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, and in the 15 years since its inception, it has been the inspiration for many economic policy success stories. As co-author Stephen Moore explains:

The thing that’s so great about our country is this system of federalism where every state can compete with each other.  And we knew from decades of research that states with lower taxes, and states that had right-to-work laws, and states that allowed more freedom for their workers and businesses had better performances. And we wanted to really chronicle that in this report.

The ultimate success story of Rich States, Poor States is Utah, which has ranked 1st in Economic Outlook for every edition. How has Utah been able to hold the top spot? The answer is twofold. Major free-market and pro-taxpayer policy reforms in recent years have been essential to the success of Utah. Additionally, the continued commitment by leading policymakers to study Utah’s economic resume and stay ahead of the curve has also been crucial to Utah’s longstanding success. As Utah Senate President Stuart Adams, 2021 ALEC National Chairman, explains:

For more than a decade, Utah has secured the top ranking for economic outlook in Rich States, Poor States, validating the hard work and dedication of former and current lawmakers. Ranking as the most competitive state in the nation this many years in a row does not just happen by chance. Years of planning and preparation placed our state in a strong position to recover and succeed even in tough years like 2020. Our commitment to excellent policy drives our decisions and will keep our state moving in a positive upward trajectory.

The best turnaround story from Rich States, Poor States so far has been that of North Carolina. In the first edition of the rankings, the Tarheel State ranked 21st and would drop to a low of 26th over the next few editions. Today, North Carolina stands strong in 2nd. This is largely due to the commitment to tax reform over the last decade, including the switch to a flat tax in 2015 and business income tax reform in 2021 that will phase out the tax altogether over the next five years. North Carolina Senior Chairman of the House Appropriations Committee and ALEC Board Member Jason Saine described how Rich States, Poor States impacted the commitment to economic reform in North Carolina:

States are continually competing to offer the most pro-growth economic conditions. Over the years, Rich States, Poor States has become the premier source by which state lawmakers measure the economic competitiveness of their states. The research in Rich States, Poor States and the undeniable interstate competition for economic wellbeing led us down the path of successfully enacting the most significant tax reform in North Carolina state history. When states compete on the merits of good public policy, ultimately our hardworking taxpayers are the real winners.

U.S. Senator Thom Tillis, ALEC alum and former Speaker of the House in North Carolina, explains the utility of Rich States, Poor States to legislators:

Rich States, Poor States continues to generate in-depth policy information that is critical to making decisions that will move states in a more economically sustainable direction. This publication is an important tool for policymakers, and I consider it essential to understanding what makes each state competitive in a global economy.

The success of the North Carolina flat tax reforms, inspired by Rich States, Poor States, created a larger movement: the State Flat Tax Revolution. Kentucky, which is starting to see its own economic outlook turnaround, made the switch in 2019, and in 2022 alone, five states made the switch to a flat tax. The 2022 movement began in Iowa in March, as Governor Kim Reynolds, an ALEC alum, signed the $2 billion tax cuts the same day that she delivered the rebuttal to President Joe Biden’s first State of the Union Address. It then continued in Mississippi with the largest tax cut in state history and then in Georgia. That September, Idaho lawmakers would reconvene for a one-day special session to enact their second tax cut of the year, which made the state’s personal income tax flat.

Then there’s unique case of Arizona, the fifth state to switch to the flat tax in 2022. The switch was not a product of 2022 legislation but of a court decision combined with the hard work from lawmakers in 2021 that helped Arizona pull off a comeback after a quick downfall. In 2020, voters approved Proposition 208 which implemented a surtax that effectively made the top marginal personal income tax rate 8%. Arizona subsequently dropped to 13th in Rich States, Poor States. The legislature convened in 2021 with the intention of implementing pro-growth tax reform and, as a result, passed a historic budget that, with the surtax, made a two-rate structure with the top rate 4.5%. In 2022, the Arizona Supreme Court overturned the surtax, and Arizona now has a flat tax with the nation’s lowest personal income tax rate. Arizona ranks 3rd in Rich States, Poor States. Former Arizona Senate President Pro Tempore Vince Leach, who previously chaired the ALEC Tax and Fiscal Policy Task Force, described the reforms perfectly:

With this victory, taxpayers will be able to keep more of their hard-earned money, and Arizona will remain one of the best states in America in which to live, raise a family and start a business.  Furthermore, the Arizona tax structure will once again encourage more businesses to set up shop here and grow jobs and the economy for all.

The State Flat Tax Revolution is notable in its own right, but it may also be the first step in an even more impressive movement. The states with no personal income tax tend to rank well in Rich States, Poor States, and as Mississippi Speaker of the House Philip Gunn, a member of the ALEC Board of Directors, says, the State Flat Tax Revolution could be the first step in the No Income Tax Movement.

As Dr. Laffer puts it, “People go to where they have more freedom, to where they have a better chance of economic prosperity.” In the last 16 years, Rich States, Poor States has helped states legislators to seek pro-growth economic policy in the states, and millions of taxpayers have responded by voting with their feet. The future is bright for those states like Iowa, Mississippi, Kentucky, West Virginia and many more where lawmakers continue to use Rich States, Poor States as a guide to a better economic future.