December 29, 2015

Virginia is for (Freedom) Lovers

Daniel Bennett

Research Professor, Baugh Center for Entrepreneurship and Free Enterprise, Baylor University

For some Virginians, the college football season may have been a slight disappointment.

Even with a memorable bowl game win against Tulsa, the Hokies won only half of their games in regular season play, while the Cavaliers lost twice as many games as they won. The outlook for college basketball, however, is brighter for Cavaliers fans, as U.Va. is currently ranked in the top 10 nationally. While this might provide Virginians some reassurance as 2016 approaches, another ranking of a different stature should generate some increased optimism around the state.

According to the Fraser Institute’s 2015 Economic Freedom of North America (EFNA) report released earlier this month, Virginia is ranked as the sixth freest state in the United States.

Readers may question the important role economic freedom plays in their lives, or wonder why they should care about it at all, but the answer is simple. We experience economic freedom when we have the right to voluntarily choose, trade, cooperate — or compete — with others. When we and our property are protected by the rule of law, we generally find ourselves at liberty to utilize our time, talent, and resources in the manner that we deem best.

A study I co-authored with renowned economist Richard Vedder found economic freedom to be associated with greater income equality. Additionally, a growing body of evidence suggests that economic freedom consistently influences other positive outcomes such as economic growth, job creation, and happiness.

The EFNA data is compiled by measuring three major areas — government spending, taxation, labor market freedom — each of which contains several subcomponents. Each subcomponent is converted to a 0-10 score, increasing in freedom. Virginia received an overall score of 7.6 in the 2015 report — based on 2013 data — making it the sixth most free state in the nation, trailing only New Hampshire, South Dakota, Texas, Florida, and Tennessee.

The report found that states scored highly in the government spending category when government spending was low relative to personal income. Virginia scored a 7.5 here, making it the eighth most free state. Virginia’s score in this area has steadily declined over the past three decades, signaling that government spending has grown faster than personal income. As recent as 2001, Virginia earned a score of 8.9. In 2013, state and local government spending represented 15.2 percent of personal income.

States scored highly in the taxation category when tax revenues were low relative to personal income and when state income taxes were less progressive. Virginia received a score of 7.2 in this area, making it the 10th most free state. Virginia’s score in this area has been relatively stable over time, and has increased since the onset of the Great Recession.

In the labor market freedom category, states with the highest scores had the lowest shares of employees in the government sector and belonging to unions and a minimum wage that was low relative to average wages. Virginia has shown marked improvement in this area over time, increasing its score from 5.3 in 1981 to 7.2 in 2013 — tied with Maryland as the most free state. Since Virginia is a right to work state, only 6.4 percent of its employees belonged to a union in 2013. However, nearly 535,000 of Virginia’s 4.9 million employees (10.9 percent) worked for the state or a local government.

Fortunately, private sector growth has been strong in Virginia, likely aided by the attractiveness of Virginia’s corporate income tax system (the state ranks sixth in the Tax Foundation’s State Business Climate Index corporate tax rank). Using a different set of variables, the Mercatus Center at George Mason University also ranked Virginia as the sixth most economically free state in 2011.

Regardless of how positive the state’s economic outlook may appear, a lower tax burden should be a top priority for state and local legislators in 2016. State and local governments should also prioritize and reduce spending, and decrease regulatory burdens due to occupational licensing.

The EFNA report measurement does not account for occupational licensing requirements, yet the Mercatus Center ranked Virginia 34th in terms of occupational freedom in 2011, which leaves significant room for improvement.

State level reforms that enhance economic freedom and improve well-being should be a priority for Virginians in the coming year. Let’s keep Virginia the state for freedom lovers.