Fiscal Freedom
The fiscal policy dimension (Figure 1) consists of six variables: (a) state tax revenues, (b) government consumption, (c) local tax revenues, (d) government employment, (e) government debt, and (f) cash and security assets, each of which earns a significant weight because of its importance. The tax, debt, and assets variables are measured for each fiscal year, whereas the employment and consumption variables come from different sources and are available for the calendar year. The weights don’t add up to 30.5 percent, because they vary by year, as the federal tax deduction has changed.
Figure 1
The fiscal policy ranking is available in Table 1. Florida and New Hampshire are neck and neck at the top, followed by South Dakota and Tennessee. None of these states have broad-based personal income taxes. Florida has seen stunning improvement on government consumption, government employment, government debt, and local taxation since 2009. State taxes have also fallen. New Hampshire has almost kept pace, with government consumption, employment, and debt falling consistently since the Great Recession, while holding state taxes at a very low level.
Because the two taxation variables make up a large share of fiscal policy’s weight, it is unsurprising that low-tax states dominate the top of the fiscal policy rankings, whereas high-tax states fall at the bottom. In Table 1, the numbers represent the number of weighted standard deviations by which each state is above the average.
A state that is one standard deviation better than average on every single policy will end up with an overall freedom score of 1.0, while a state that is one standard deviation worse than average on every single policy will end up with an overall freedom score of −1.0. Since fiscal policy represents less than a third of the overall index, Hawaii’s score of −0.53 means that it is on average more than a standard deviation worse than average on every fiscal policy.
Hawaii outdoes New York for last place mainly because of a spike in state-level taxes in FY 2022. This spike was mostly driven by an increase of more than 25 percent in consumption tax revenues. New York itself has also declined on fiscal policy over time, with government consumption growing and state tax burden rising, even as local tax and state plus local debt burdens have fallen slightly.
Figure 2 shows how the average fiscal policy score has changed for all 50 states since 2000. It appears that states’ fiscal policies have improved since the Great Recession, mostly because of declining tax burdens and spending cuts, but have deteriorated since the COVID-19 pandemic.