Freedom and Finances

The Cato Institute, a Washington D.C. based think tank, recently released their 5th Edition of Freedom in the Fifty States. The 150+ page report, and accompanying web-based interactive infographic, are a fascinating peek into the various state laws that govern everything from taxes to gun laws to business licensure in each of the fifty states. It is the update to the 4th edition, which was last published in 2014.

Unlike most such rankings the criteria and weightings are well-described, cited accordingly and the data is made publicly available for further research. For those who disagree with the methodology, the ability to partially customize the weightings is a welcome addition.

While the topic of freedom and the accompanying definition is more of a political topic than a financial one, it should still be a concept that astute investors should take an interest in. Freedom, particularly economic freedom has a significant impact on your finances, both directly and indirectly. As we learned from the report, the full text of which can be found here, there is a marked difference from state to state.

The obvious and immediate consideration most of us think of regarding economic freedom is tax rates. States with high taxes are comparatively lower on the freedom index than states with correspondingly lower tax rates, all else being equal. A lower tax rate directly translates into how much money you have left over after the government takes its cut. Money for which you get to decide the best use for, not some bureaucrat or elected official.

The business and licensing environment is also a big factor with regard to whether a state ranks high or low in certain economic freedom indicators. If you’re a business owner you already know how difficult it can be to navigate the bureaucracy necessary to start a business, obtain the appropriate licenses or incorporate. It stands to reason therefore that states with inefficient and burdensome systems will find fewer people willing to risk new business ventures and therefore, over time, fewer job opportunities may be available.

The regulatory environment is also a major consideration. High levels of regulation discourage businesses from setting up shop in a state when less intrusive options are available. The time necessary to comply with regulations, many of which seem arbitrary or unnecessary, is time not spent tending to the business. Most business owners would prefer to focus on aspects that will grow the company, not merely keep it afloat in a sea of red tape.

It’s not just businesses that can up and move. People are increasingly voting with their feet as well. States with comparatively more attractive tax rates and business environments are seeing an influx of residents, while states with burdensome systems are seeing their populations stagnate or even decline. These are not accidental occurrences. In the absence of reforms, high tax/low economic freedom states can expect to continue to see an outflow of residents and businesses, while their local economies will generally trail that of more free states.

Of course, there are certain exceptions. New York City, despite its many burdensome regulations and high taxes continues to attract companies because it is a proven world-wide business hub. Despite the high cost of living, many people still want to live there, and are willing to accept a lower standard of living than they would have elsewhere. The rest of the state of New York, however, is fairing much worse as a result of the lack of economic freedom, and is much more in line with the rule, rather the exception.

See for yourself how your state stacks up and whether you agree with the rankings. Regardless of whether your state is high or low on the list, most of us can agree that having more money and more freedom to choose what to do with it is preferable to the alternative.

The full, written report can be found here. The infographic is here, and the methodology can be found here.