In Rankings of State Fiscal Health, Economic Freedom is the Key

States with more economic freedom are in good fiscal health this year, while states with less economic freedom continue to show weakness on a range of important fiscal indicators, according to a ranking by the Mercatus Center at George Mason University released last month.

In the report, Mercatus scholars ranked the fifty states according to their fiscal health in five dimensions: cash solvency, budget solvency, long-run solvency, service-level solvency, and trust fund solvency.  States that are generally seen as conservatively-governed topped the charts, with Alaska, North Dakota, South Dakota, Nebraska, and Florida sitting in the top five. These states tend to have more conservative economic policies, such as lower taxes and regulations, and smaller state governments as a share of the state’s GDP. At the bottom of the rankings were states such as Illinois, New Jersey, Massachusetts, Connecticut, and New York, whose high deficits and unfunded debt obligations put taxpayers at risk in both the short and long term.

While the states at the top of the rankings are in a better position than those at the bottom, the authors of the report caution that each state faces substantial long-term challenges concerning pension and health care systems. If policymakers wish to secure good fiscal health for their states in the long-term, comprehensive reform of entitlements and pensions will be necessary.

Last year, The LIBRE Initiative weighed in on the benefits of economic freedom by examining the performance of different states in rankings of the best cities for jobs and Hispanic entrepreneurship. Texas and Florida — which both ranked well in the fiscal health report from the Mercatus Center — also scored highly in these previous rankings. Both states are home to cities that provide good environments for Hispanic job seekers and entrepreneurs, and should serve as models for policymakers wishing to increase the prosperity and success of U.S. Hispanics.

This latest ranking of the states has further confirmed what many already know, high taxes are not the key to good fiscal health –contrary to the claims of big government proponents.  States that keep the public sector smaller as a percentage of GDP, maintain sound budgets, and spend less tend to be able to pay their debts and obligations more effectively even when they have lower taxes. In fact, states with lower taxes tend to be in better fiscal health overall.

In the short term, U.S. Hispanics are still dealing with the aftermath of the recession, and the administration should not be so quick to pat itself on the back. If long term prosperity for the Hispanic community is the goal, this new report from the Mercatus Center shows a path to reach it. Policymakers around the nation should take note of states that are performing well, and learn from their example.