Among the 15 states with the fastest economic growth over the past decade, nine forgo at least one major tax — typically the individual income tax. Of the remaining six, five have a single-rate income tax, and all six have cut income tax rates in the past few years. Conversely, among the bottom 15 states for growth in gross state product (GSP), only one (Alaska) forgoes any major tax, though several other states have adopted tax reforms as they seek to escape the economic basement.
Similarly, nine of the top 15 fastest-growing states were ranked in the top third for “entrepreneurship and growth” by the Archbridge Institute in its Social Mobility in the 50 States Index, and many of the cities with the highest rates of economic growth have distinguished themselves with zoning and land use policies that facilitate rather than hinder new construction.
Among the 15 states with the fastest economic growth over the past decade, nine forgo at least one major tax — typically the individual income tax.
Americans have always been a people on the move, and that is especially true of the country’s innovators and job creators. The rise of remote work adds a new chapter to an old story for those making their way in the world: now, instead of following job opportunities, many have the option of letting the jobs follow them.
Employers, meanwhile, can locate in the cities and states they find most attractive with fewer concerns about the existing workforce, since many skilled workers can be hired remotely. (Many positions, of course, are always in-person, and these location decisions still matter greatly for local employment options.) Both individuals and businesses are better able to sort geographically on what matters to them.
People’s choices, as always, will reflect a mix of preferences, some outside policymakers’ control. But states can seize the moment with competitive, pro-growth tax codes; with regulatory environments that encourage rather than constrain innovation and expansion; with licensing rules that let people get to work by assessing qualifications without unnecessary bureaucracy and delay; and with housing policies that recognize that the key to housing affordability and availability is to allow people to build.
Florida and Texas have long been overperformers, and their growth-oriented policies continue to attract those departing less competitive environments. But western states such as Utah, Idaho, and Arizona now routinely rank among the top in population growth, job creation, and investment, with southern states such as South Carolina, Tennessee, and Georgia also climbing.
What is the secret to their success? What grand plan is paying off?
In many respects, it’s the deliberate absence of a grand plan. What unites them is a belief in unleashing the power of markets.
What unites them is a belief in unleashing the power of markets.
Policymakers in these states have reformed their tax codes and delivered both individual and corporate income tax rate relief, prioritizing more neutral tax codes that avoid picking winners and losers, with low rates applied to broad bases. Notably, all six of these states cut income tax rates since 2021, sometimes multiple times. (In Tennessee’s case, the state eliminated its narrow tax on interest and dividend income, joining the ranks of states with no taxes on individual income.)
Some of the nation’s fastest-growing states have also made it easier to transfer regulatory licenses into their states, attracting workers who would be subject to lengthy recertification processes in other states. And they’ve adopted land use policies that encourage new construction while, for the most part, avoiding short-sighted property tax relief measures that shift tax costs to new construction.
If there’s one policy area that could trip up these fast-growing states, though, it’s the property tax. Even with policies enabling new construction, dynamic economies with rapid population growth yield significant increases in assessed values, which can easily translate into much higher property tax bills. Well-designed levy limits, which roll back rates in response to rising valuations, can keep taxes in check. Unfortunately, many policymakers are enticed by other policies that look good on paper, but “work” by shifting tax burdens to new construction and new homeowners. Those policies pull the rug out from under the rising generation and the skilled workforce states need to attract, even as the most growth-oriented states are setting out a welcome mat.
Recent years have seen a sharp divergence between states prioritizing economic competitiveness and those focused on progressivity. On individual income taxes, for instance, the median top marginal rate is now below 5 percent — but policymakers in a few states are doubling down on high taxes, proposing rates above 10 percent. Voters in California, meanwhile, might approve a first-in-the-nation wealth tax this year.
Taxpayers have far more low-tax, low-regulatory-cost options than they did a decade ago, and are more empowered to move. People aren’t all looking for the lowest-tax option — they care about the overall cost of living and quality of life, and about schools, roads, and amenities — but states are in intense competition for increasingly mobile businesses and workers, and those that don’t realize it will pay a price.
State and city officials can’t move mountains, literally or figuratively. Utah officials can’t offer beaches and Florida lawmakers can’t deliver mountains. But lawmakers in every state can reduce regulatory burdens, improve housing policy, and implement reforms to make the tax code more neutral and pro-growth.
Jared Walczak is a Senior Fellow at the Tax Foundation, where he spent five years as Vice President of State Projects, and president of Walczak Policy Consulting. He serves as a member of the faculty of the Institute for Professionals in Taxation, sits on the state tax advisory board of the Institute for State Policy Leaders, and contributes to Tax Notes State magazine.