Laboratories for prosperity: a comprehensive study confirms that free-market principles work outside Washington.

• Author: Hood, John

Over the past three decades, America's state and local governments have experienced a large and underappreciated divergence. Some places, usually but not always led by Republicans, have become friendlier to free enterprise. Other places, usually but not always led by Democrats, have become friendlier to big government. Some political scientists call it the Big Sort. You can see the self-selection manifest itself in polls, in voting behavior, in migration patterns, and in policy outcomes.

Think of it as a vast natural experiment in economic policy. Because states have a lot otherwise in common-cultural values, economic integration, the institutions and actions of the federal government--testing the effects of different economic policies within America can be easier than testing them across countries. Governors, state legislators, and other policy makers have dutifully supplied the experimental data. And scholars have been studying the results.

I head the John Locke Foundation, a state policy think tank in North Carolina. A recent change in our state's political leadership prompted us to assemble a summary of all that diverse academic research for legislative leaders and our new governor, Pat McCrory. Setting aside studies published by think tanks, we limited ourselves to scholarly articles about economic policy published in academic or professional journals. At present our database contains 528 articles published between 1992 and 2013. On balance, their findings offer strong empirical support for the idea that limited government is good for economic progress.

Taxes Matter

Of the 112 academic studies we found on overall state or local tax burdens, for example, 72 of them--64 percent--showed a negative association with economic performance. Only two studies linked higher overall tax burdens with stronger growth, while the rest yielded mixed or statistically insignificant findings.

On smaller categories of taxation, the trend was similar:

There was a negative association between economic growth and higher personal income taxes in 67 percent of the studies. The proportion rose to 74 percent for higher marginal tax rates or tax code progressivity, and 69 percent for higher business or corporate taxes.

Some of the strongest negative results appeared when scholars were able to isolate policy variables from background effects. For example, a 1996 study in the American Economic Review exploited the fact that some foreign countries gave domestic tax credits to companies that pay taxes in the United States, so those companies would be expected not to care much about state tax rates. In other countries, companies didn't receive such credits and would thus be subject to greater variation in state tax burdens. By looking at the behavior of firms based on their home country, author James Hines of the University of Michigan found that "state taxes...