Economic freedom is the key to prosperity, but Florida isn't as free as other states. Excessive state and local government spending is one big reason why.
What's holding Florida back?
The Sunshine State ranks 21st among the 50 states in the latest Economic Freedom of North America report published annually by the Fraser Institute in Canada.
The primary author of the most recent report is Dean Stansel, associate professor of economics at Florida Gulf Coast University in Fort Myers and former fiscal policy analyst at the Cato Institute in Washington, D.C.
Stansel is blunt about the reason behind Florida's mid-pack performance: State and local government spending is higher and rising faster than in other states. Specifically, government consumption spending was 15.7% of the state's gross domestic product, well above the average 14.6% for the rest of the country. In Texas, a state that often competes with Florida for corporate relocations, government spending represents 10.6% of the state's GDP.
“Spending growth has been excessive,” says Stansel. In particular, he cites a recent analysis that showed Florida's subsidies such as tax breaks and incentives for corporations are much more significant compared with other states. “We spent about $4 billion on these targeted subsidies,” he says. “It's harmful to our economy.”
Fact is, government spending crowds out private-sector growth. “It's bigger than in many states we compete with,” he says. “We need to revisit the role of government.”
Stansel says cutting taxes or setting funds aside in a “rainy day” fund are two ways to indirectly curb government-spending growth. “One way to slow spending growth is to slow revenue growth,” he says.
Stansel's report isn't unique. A similar economic freedom index produced by the Mercatus Center ranks Florida 17th and the Cato Institute's biennial Fiscal Policy Report Card on America's Governors recently gave Gov. Rick Scott a “D” for his tax and budget policies, he notes.
On the other hand, Stansel says that you get a different picture if you examine tax rates rather than levels of revenue and spending as a percentage of GDP. The Tax Foundation's most recent annual State Business Tax Climate Index, based on tax rates of the five major state and local taxes, ranks Florida No. 5.
Of course, Florida has some unique characteristics that may distort the data, too. For example, tax revenues from tourists to Florida give the state government more money to spend than other states where tourism isn't as significant. “We export a big share of our tax burden on tourists,” says Stansel.
Stansel says Florida could easily move up the ranks if it can start getting state and local spending under control because the scores separating the state from the top 10 aren't vast. “We're not that far off,” he says.
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