(The Center Square) – Most Southwestern states finished high or in the middle in a state-by-state ranking of tax policies and the economy.
But not California.
The Golden State ranked near the not-so-golden bottom of the “Rich States, Poor States” list.
The American Legislative Exchange Council, a free markets policy organization, released its annual report Wednesday, noting that No. 1-ranked Utah had the best economic outlook of the 50 states. The worst at No. 50 was New York.
At No. 47, California once again ranked near the bottom of ALEC’s list, as one of the most widely known high tax states.
Elsewhere, Arizona (No. 5) broke into the top 10. Nevada (No. 12) sat just outside the top 10 while Colorado (No. 29) and New Mexico (No. 35) were in the middle of the pack with Hawaii among the bottom 10 (No. 43).
Economists explained why taxes and economic outlooks are so closely linked.
“Whether states like it or not, they absolutely have to compete with the other 49 states every single day for businesses and for individuals,” said ALEC Chief Economist Jonathan Williams.
“When businesses and individuals are looking where to invest, they’re looking at states that have a more competitive economic climate, including lower taxes, limited regulation, better labor policy, and overall better economic outlook and opportunity,” Williams told The Center Square.
Williams said ALEC’s “Rich States, Poor States” list over the last 19 years has ranked states based on their economic outlook. The ranking especially rewards states with low tax rates and tax burdens in ALEC’s 15-policy assessment.
“The state with a higher tax rate is going to discourage economic activity compared to the state with a lower tax rate,” economist Wayne Winegarden told The Center Square.
“Now, obviously taxes are not the only consideration, and that’s why you still see growth in high tax states. It’s a very complicated issue,” said Winegarden, a senior fellow in business and economics at the Pasadena-based Pacific Research Institute. “But the basic truth is that when you have an excessively high tax rate, you’re discouraging economic activity, or you’re encouraging it to occur in other places.”
ALEC ranked state minimum wages in reverse order, with the highest minimum wages, like California earning one of the lowest spots in the category at No. 48.
“I think it’s really important to recognize we’re not talking about human value. We’re talking about what’s the value of their economic contribution. When you force the minimum wage above that, you’re going to encourage people not to hire,” said Winegarden. “We actually have seen that in California when they raised the minimum wage … In McDonald’s, you now use the kiosk. You don’t have somebody taking your order. They hire fewer people and they cut down in hours.”
Winegarden said a low minimum wage allowed for more entry-level jobs for people to build skills that would raise their economic value. He added that while minimum wage is probably too low to live on, the argument for a social responsibility to pay people enough should not burden employers.
Utah has the federal minimum wage of $7.25, which was set in 2009, while Arizona has one of the nation’s highest minimum wages at $15.15. California’s minimum wage is $16.90.
Another key factor in ALEC’s state economies ranking was the absolute domestic immigration – how many people are moving in or out of other states.
“Some of our states at the top of our rankings are some of the most quickly growing states in America,” said Williams. “States at the bottom like New York, California and Illinois are hemorrhaging people. It means you’re losing economic vitality. You’re losing your tax base that’s going and becoming taxpayers in other states.”
Florida ranked first in ALEC’s domestic migration with over 2.5 million more people moving to the state over the past decade than leaving, followed by Texas at nearly 2 million. On the opposite end, New York saw more than 1.6 million people leave the state, followed by nearly 1.5 million from California.
“I’m showing my bias here, but why would you leave California for Texas?” said Winegarden. “We’ve got much better weather in California. We don’t get hurricanes … It’s hard to imagine why you would do that, but the taxes are so punishing here, and the cost of living is so high.”
Recent years have seen consistently high numbers of California residents moving to Nevada, with a Las Vegas Review Journal report finding that the largest share of new Nevada residents came from Los Angeles.
“In recent years, [some] Californians are looking to stay relatively out west but not pay California-styled taxes,” WIlliams said of Nevada.
Southwestern states have generally performed well by ALEC’s metrics, but both New Mexico and Colorado slipped into the bottom half of states this year.
“[Colorado] was the state with the second largest decline in the rankings, going from 17th to 29th this year,” said Williams. “Some of that is workers’ compensation costs, sales tax increases, tax burden increases, minimum wage increases.”
But he also added that while Colorado had not made many major economic changes over the past year, other states had reduced taxes in a way that made Colorado fall behind on their ranking.
“ New Mexico has been a state that has been overspending, overtaxing and overregulating and really depending on its oil and gas industry revenue that it generates to try to keep the state afloat,” said Williams.
He added that Hawaii faced a uniquely difficult housing affordability crisis, but praised Democratic lawmakers in the state for reducing some taxes he said would ease the cost of living.
Arizona broke into the top five states for its economic outlook by ALEC, which may come as a surprise to some of the state’s economists after a report this week by the economic research organization Common Sense Institute of Arizona ranked the state the seventh least affordable in the country.
The report emphasized how Arizona households keep roughly 5% less of their income after taxes and essentials compared to the U.S. average. CSI found that the average cost of shelter and utilities alone increased by $9,012 between 2019-2025 in the state.
But Williams, the ALEC chief economist, asserted that Arizona faced an optimistic future with “incredibly good-value proposition for businesses and families.” He added that policies generally take three to five years before an impact is seen in data.
