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by K. Lloyd Billingsley | Sacramento Today, one day after a national election, a special California legislative session, called for by Governor Schwarzenegger, begins to deal with this fiscal year’s budget deficit, as high as $10 billion by some estimates. This session could be of some value if legislators consider a key subject they neglected through this year’s 85-day budget marathon – how California’s lack of economic freedom affects state revenue and general prosperity, especially jobs. Here California can learn from those states with the most economic freedom, because they perform better on all fronts. In 2005, the 15 freest states saw their general fund tax revenues grow at a rate more than six percent greater than the 15 states with the least economic freedom. Per-capita income in the 15 most economically free states grew a full 31-percent faster than in the 15 states with the lowest levels of economic freedom. In those states with the most economic freedom, employment growth was a full 216 percent higher than those states unfriendly to free enterprise and consumer choice. California, unfortunately, is one of those states. California ranks a dismal 47th out of 50 states in economic freedom, according to PRI’s U.S. Economic Freedom Index: 2008 Report, up from an even worse 49th place in 2004. Kansas, the frontrunner in 2004, has dropped to number 10. Texas plunged from 17 to 34 and New York still ranks dead last. In California, unemployment is growing, not jobs. Two years ago the unemployment rate was 4.6 percent. It now stands at 7.7 percent, predictable in a state that maintains conditions hostile to job growth. Contrast the record of other western states. Idaho, Colorado, Utah and Wyoming all place in the top 10 in economic freedom. Workers, investors and entrepreneurs seek out such liberated environments. As The Economist recently noted, the unemployment rate in Utah is 3.5 percent, less than half of California’s and “hardly a month goes by without Utah announcing a corporate relocation or a new factory.” In California the trend is more outbound than inbound, and that also applies in revenue. State spending has increased at a faster rate under Gov. Arnold Schwarzenegger than under his predecessor, Gray Davis. California continues to put taxpayers on the hook without any meaningful reform. All told, a deficit of $10 billion should come as no surprise. The governor wants to make cuts in the state’s government education system, which abounds in bureaucracy, waste and corruption. He also wants to increase the state sales tax, which some legislators want to extend to services such as yard work and car repair. Those states leading the economic pack, however, keep taxes low. South Dakota, number one in the current Index rankings, imposes no tax on corporate income or personal income and does not tax personal property, business inventory, or inheritance. This year Forbes magazine ranks Sioux Falls, South Dakota, as the best smaller metropolitan area for business and careers. The Index rankings derive from a comprehensive evaluation of fiscal, judicial, and regulatory indicators such as tax rates, state spending, occupational licensing, environmental rules, income redistribution, tort reform, and prevailing-wage laws. California remains a high-tax state and its dependence on high earners leaves the state vulnerable to severe fluctuations in revenue. The state also abounds in burdensome regulation and abusive lawsuits. Last week, Governor Schwarzenegger issued an executive order to create the Commission on the 21st Century Economy, “to re-examine and modernize California’s out-of-date revenue-gathering laws that contribute to our feast-or-famine state budget cycles.” While this commission deliberates, the governor and legislators should use the special session to expand economic freedom in California. As the record shows, workers and government alike will benefit. Accounting gimmicks, borrowing, and tax hikes, on the other hand, will only deepen the downturn and delay the recovery. CRO copyright 2008 Pacific Research Institute K. Lloyd Billingsley is Editorial Director for the Pacific Research Institute and has been widely published on topics including on popular culture, defense policy, education reform, and many other current policy issues.

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