Taking Stock of Georgia’s Economic Ranking

Americans love rankings, love to see where we stand compared to our rivals. The AP college football poll, to name one famous ranking, exists ostensibly to determine the best team – but also to sell newspapers, because Americans eat that kind of thing up.

There are all kinds of rankings. But what could be more important to rank than our freedom? There are a variety of indices for that, and one of them recently showed Georgians are experiencing a golden age of economic freedom.

The Fraser Institute last month released its latest “Economic Freedom of North America” report. Defining economic freedom as “the ability of individuals to make their own economic decisions including what to buy, where to work and whether to start a business,” the Canadian think tank found Georgia ranked seventh among all U.S. states, and 12th when Canadian provinces and Mexican states are included. The ranking uses data from 2018, the most recent available.

Georgia’s 2018 ranking was the fourth straight year it finished among the top seven states, a first for our state in rankings that go back to 1981. Georgia’s previous best four-year run was from 1992-95, amid a stretch of five straight top-10 finishes.
Among the index’s three main areas for state rankings, Georgia fared best in labor market freedom, ranking fifth. Our best aspect of labor market freedom was our relatively low percentage of government employment as a share of all employment, which has steadily declined since 2009 to a three-decade low of 9.4%. That means government isn’t competing too much for talent with the private sector, which generally boasts a higher level of productivity. It also means government isn’t trying to offer too many services that could be offered by private actors.

Georgia ranked 10th on the spending metric, including seventh for government spending as a percentage of personal income. As with the labor market ranking, this indicates Georgia’s public sector isn’t crowding out private-sector initiatives. Georgia has been better on this score in the past, especially in the early 1980s, but it’s been trending in the right direction for about a decade.

The area where Georgia could stand to improve is in taxation. Although our state ranked 16th there, it was near the middle for the share of personal income consumed by income and payroll taxes. And it lagged toward the bottom for the top marginal income-tax rate and the level of income at which it’s applied – although improvement may be on the horizon, since 2018 was the last year before the top rate fell from 6% to 5.75%. Georgia fared much better on property taxes (ranking 12th) and sales taxes (13th).

It’s fairly clear that improving on taxation is Georgia’s ticket to a higher ranking. Five of the six states ahead of us lack either a state sales tax (New Hampshire, which finished first) or a state income tax (Florida, Texas, Tennessee, South Dakota). Eliminating an entire tax may be unrealistic, but more balance would be helpful.

Ten years ago, the General Assembly created a commission to study comprehensive tax reform in the name of boosting the fairness and competitiveness of our tax code. Part of the thinking then was that our state needed to be in the best competitive position possible coming out of a deep recession; another was that our economy had changed a great deal and our tax code hadn’t kept up.

Today, both of those considerations are arguably even truer than before. The recovery from the current recession, resulting from business closures due to the pandemic, will highlight the degree to which state and local governments let entrepreneurs and business owners have the flexibility to adapt to the conditions. And our economy has only transformed more over the past decade, shifting more toward (untaxed) services, new delivery methods for entertainment such as video streaming, and heavily toward e-commerce.

Taking stock of all of these changes comprehensively, rather than addressing them piecemeal, is the best way to ensure the overall tax code is fair and our economy competitive. If we don’t, the rankings will reflect our inaction.