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States with the Best Economies

Two thousand fifteen was a banner year for the U.S. economy, thanks to a strong dollar, job gains, lower oil prices, increased consumer spending, and general improvements in the housing and business sectors. And the International Labour Organization expects steady growth ahead despite a slowing global economy.But within the U.S., state economies could still be either boom or bust. Illinois, for instance, is currently in a fiscal free fall, with no budget for the second year in a row — putting its schools and social programs in peril — and the highest unemployment rate in the Midwest. Meanwhile, California has blossomed into the seventh largest economy in the world, boasting a GDP of $2.3 trillion, which was comparable to Brazil’s $2.2 trillion, in 2014.

With such wide disparities in growth, WalletHub’s analysts compared the economic performance of the 50 states and the District of Columbia across three key dimensions: Economic Activity, Economic Health and Innovation Potential. Continue reading below for our findings, expert commentary and a full description of our methodology.

Main Findings

Overall Rank State Total Score ‘Economic Activity’ Rank ‘Economic Health’ Rank ‘Innovation Potential’ Rank
1 Utah 71.55 2 2 4
2 Washington 70.68 1 10 3
3 California 67.84 4 12 2
4 Massachusetts 65.58 8 15 1
5 Colorado 60.81 9 7 5
6 Delaware 59.85 5 18 14
7 District of Columbia 59.50 17 1 10
8 New York 58.82 6 27 11
9 Texas 58.74 3 34 20
10 Oregon 57.48 10 9 13
11 New Hampshire 57.30 20 3 6
12 Maryland 56.52 19 8 7
13 North Dakota 55.15 7 13 42
14 Connecticut 54.88 15 33 8
15 Virginia 53.13 18 4 21
16 Arizona 53.10 16 23 17
17 Georgia 52.41 11 29 26
18 North Carolina 51.50 22 22 16
19 Minnesota 51.34 33 6 18
20 Michigan 51.08 26 30 9
21 Vermont 51.00 25 16 19
22 New Jersey 49.20 24 38 12
23 Wyoming 48.92 12 28 48
24 Idaho 48.80 28 19 28
25 Alaska 48.76 27 25 23
26 Florida 48.33 14 37 34
27 South Carolina 47.58 13 41 36
28 Wisconsin 47.09 38 5 30
29 Illinois 46.41 21 40 25
30 Missouri 46.04 40 11 27
31 Pennsylvania 45.05 31 44 24
32 Montana 44.99 41 20 29
33 Tennessee 44.50 32 26 41
34 Iowa 44.19 37 24 38
35 Kansas 44.18 35 31 31
36 Nebraska 43.84 42 21 35
37 Indiana 43.82 36 32 32
38 Nevada 43.78 23 35 43
39 Ohio 42.12 34 43 33
40 South Dakota 41.13 46 14 40
41 Rhode Island 39.91 45 39 22
42 Hawaii 39.35 50 17 39
43 Oklahoma 38.50 39 42 46
44 Alabama 38.00 44 46 37
45 Kentucky 36.62 30 50 45
46 Louisiana 36.28 29 49 49
47 New Mexico 34.52 47 51 15
48 Maine 34.34 48 45 47
49 West Virginia 34.31 43 47 50
50 Arkansas 33.94 49 36 51
51 Mississippi 31.86 51 48 44

 

Artwork 2016 States with the Best Economies v2

Ask the Experts

Nearly a decade since the Great Recession, some states still struggle to rebound. We therefore consulted a panel of economic experts regarding growth strategies that state economies can adopt in order to improve or return to full capacity. Click on the experts’ profiles below to read their bios and responses to the following key questions:

  1. What are the most effective ways for state and local officials to boost their local economies?
  2. What can states do to prevent “brain drain” and develop, attract and retain highly skilled workers?
  3. States often compete for business investment by offering tax breaks and other incentives. Do such efforts more often result in a net positive or net negative impact on state economies? Do such efforts create a “race to the bottom” across states?
  4. What makes a state attractive to potential entrepreneurs?

Back to All Experts

John J. McGlennon

Chair and Professor of Government at the College of William & Mary
John J. McGlennon

What are the most effective ways for state and local officials to boost their local economies?

A lot depends on the state or locality. It’s a good idea for local officials to understand their area’s competitive advantages: geographic location can’t be changed, so recognizing what kind of jobs or industries fit your community is important. For a lot of cities and counties, encouraging expansion and diversification of existing businesses may be a better investment than the elusive pursuit of the magical “clean, high tech industry” that every community seems to seek.

Local officials really need to be careful about understanding the costs and benefits to them: what local tax revenues will they collect directly or indirectly vs. how much will they have to pay in new or improved services? Will a tax break really pay for itself when businesses are much more mobile?

Often, businesses that may be considering relocation are less interested in tax breaks than quality of life and presence of a well-trained/educated workforce.

What can states do to prevent “brain drain” and develop, attract and retain highly skilled workers?

Invest in education. Promote entrepreneurship: you are more likely to have success keeping people with attachments to your state than to attract newcomers if you are already losing population. A turnaround has to start with your own folks. But be open to immigration from outside the US.

States often compete for business investment by offering tax breaks and other incentives. Do such efforts more often result in a net positive or net negative impact on state economies? Do such efforts create a “race to the bottom” across states?

If tax breaks are your first weapon, they probably won’t work out so well. They can be an effective deal closer, but if you can’t compete on location, quality of life, educated workforce and other things that should matter, you might not get such a great deal out of companies that can pick up and move or shut down overnight. If you have the attention of a company because of the desirability of your location, you should structure tax breaks which require deeper investment in the state or locality by the business (e.g., tied to hiring of locally trained workers, escalate the break as the company expands its workforce or plant size).

What makes a state attractive to potential entrepreneurs?

Depends on the entrepreneur, but usually, things like quality of life, access to markets, well maintained infrastructure and openness to new ideas.

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Timothy Duy

Professor of Practice in the Department of Economics and Senior Director of the Oregon Economic Forum at University of Oregon
Timothy Duy

What are the most effective ways for state and local officials to boost their local economies?

Build off of their existing set of assets. In other words, don’t try to build something like a new “cluster” from scratch. Everyone wants a “biotechnology” cluster, but few regions have one and difficulty of building one from scratch means officials will spend vast amounts of time and money on a project that is not likely to succeed.

Instead, identify the clusters of firms already in your region and ask why they are successful. It will likely be some mix of workforce, proximity to customers or raw materials, and area infrastructure. Once you understand your asset base, local officials can work to protect that base and ensure that local firms can grow. And then, officials can begin the process of promoting your region to firms that need that same set of resources you have already developed.

Note that this is never an easy process. Strengthening and expanding the local economy takes a lot of time and effort – and a broad coalition of private and public partners need to buy into the plan to make it effective. Achieving that buy is a critical part of that process.

What can states do to prevent “brain drain” and develop, attract and retain highly skilled workers?

Work to promote the amenities those workers desire – schools, housing, recreational opportunities, etc., while at the same time supporting the firms that employ those workers. You are most likely to retain workers if they are both attached to the community and have an opportunity to grow their careers.

States often compete for business investment by offering tax breaks and other incentives. Do such efforts more often result in a net positive or net negative impact on state economies? Do such efforts create a “race to the bottom” across states?

I remain wary of tax breaks. The primary reason a firm moves into your region is because it fundamentally fits with the available resources. Tax incentives are just the icing on top of the cake – firms ask for them because they can, and local officials often oblige, but they are not the reason a firm comes to a region. Also, there are plenty of cases of firms receiving a hug tax credit only to leave a community a few years later, leaving behind a hole in the local economy. Such failures foster community resentment against economic development activity and may limit future opportunities.

That said, I also believe that tax incentives should remain in the developer’s tool kit. This may be particularly important for recruiting firms with high capital to labor ratios – firms that would pay multiples of taxes per worker over that paid by the average firm in the community. In such cases, there may be room to use incentives effectively. It still requires good judgment on the part of development officials to implement effectively.

My preference is to use incentives in such a way that they add to the stock of publicly available infrastructure. For instance, a firm may need access to better sewers or a new highway access to expand. Once these assets are created, other firms, both existing and new, can use them. They become public goods. Another example is that maybe an incoming firm needs a high speed internet cable to succeed. Once that cable is laid, other firms will be able to tap into it.

What makes a state attractive to potential entrepreneurs?

A presence of other entrepreneurs for networking, ease of doing business (permitting, etc.), access to capital (banks, venture capitalists), resources to grow (land, labor, infrastructure). And livability – that can be a driving factor in the decision making process. But even if they come for the lifestyle, they eventually will need those other factors if they want to grow.

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Henry Sirgo

2016 McLeod Endowed Professor in the Department of Social Sciences at McNeese State University
Henry Sirgo

What are the most effective ways for state and local officials to boost their local economies?

State and local officials must commit resources to education and infrastructure. The Republic of Korea and Finland are about the size of the average U.S. state. These nations have high performing economies. Finland, which consistently ranks at or near the top in educational attainment of its elementary and secondary students, routinely requires that teachers have degrees in the disciplines which they teach. South Korea, which has surged in its economic ranking among the members of the Organization for Economic Co-Operation and Development, has among the world’s best rapid mass transit systems.

What can states do to prevent “brain drain” and develop, attract and retain highly skilled workers?

Place an emphasis on elements of the core curriculum when dedicating funds to elementary, secondary, and higher education. Examine detailed documents of the past including the National Defense Education Act of 1958 and the exemplary document produced by the National Commission for Excellence in Education during the tenure of U.S. Secretary of Education, Terrell Bell. Highly skilled workers, when deciding whether to remain in a community consider whether public schools offer Advanced Placement (AP) courses in biology, calculus, economics, foreign languages, political science, and physics.

States often compete for business investment by offering tax breaks and other incentives. Do such efforts more often result in a net positive or net negative impact on state economies? Do such efforts create a “race to the bottom” across states?

Since predictability is paramount when choosing a business location, such efforts usually generate a negative impact on state economies and create a “race to the bottom”.

What makes a state attractive to potential entrepreneurs?

Entrepreneurship is inherently creative. Communities with cultural amenities and other elements which contribute to a high quality of life will attract and retain such individuals and foster civic engagement.

Methodology

In order to identify the best-performing state economies, WalletHub’s analysts compared the 50 states and the District of Columbia across three key areas: 1) Economic Activity, 2) Economic Health and 3) Innovation Potential.

We first identified 23 relevant metrics, which are listed below with their corresponding weights. Each metric was given a value between 0 and 100, wherein 100 represents the most favorable economic conditions for a state and 0 the least.

Finally, we calculated the overall score for each state using the weighted average across all metrics and ranked the states accordingly.

Economic Activity – Total Points: 40

  • GDP Growth: Full Weight (~8.00 Points)
  • Exports per Capita: Full Weight (~8.00 Points)
  • Percentage of Fast-Growing Firms: Full Weight (~8.00 Points)
    Notes: This metric measures the number of firms in each state that are included on the “Technology Fast 500” list (Deloitte report) as a share of total firms in each state.
  • Business-Startup Activity: Full Weight (~8.00 Points)
  • Quality of State Legal System: Full Weight (~8.00 Points)

Economic Health – Total Points: 40

  • Unemployment Rate: Full Weight (~3.64 Points)
  • Nonfarm Payrolls Change: Full Weight (~3.64 Points)
  • Civilian Labor-Force Change: Full Weight (~3.64 Points)
  • Median Annual Household Income: Full Weight (~3.64 Points)
  • State-Government Surplus/Deficit per Capita: Full Weight (~3.64 Points)
  • Unfunded Liability (Public Pension Plans) per Capita: Full Weight (~3.64 Points)
  • Percentage of Population Lacking Health Insurance: Full Weight (~3.64 Points)
  • Percentage of Residents Living Below Poverty Level: Full Weight (~3.64 Points)
  • Foreclosure Rate: Full Weight (~3.64 Points)
  • Immigration of U.S. Knowledge Workers (Average Educational Attainment of Recent Migrants from Abroad): Full Weight (~3.64 Points)
    Notes: The educational attainment of recent immigrants aged 25 and older from abroad (“moved from a different country”) is classified as having either no high school diploma, a high school diploma (or equivalency), some college experience or an associate’s degree, a bachelor’s degree, or a graduate or professional degree. Each degree class was assigned a weight based on the equivalent average years of schooling the U.S. education system would require for the level of educational attainment:

    • 0 for no high school diploma,
    • 12 for high school diploma,
    • 14 for some college experience or an associate’s degree,
    • 16 for a bachelor’s degree, and
    • 18.95 for a graduate or professional degree (the average number of years of schooling of the U.S. population of graduate, professional, and doctorate degree holders)

    The number of recent immigrants in each education class was multiplied by its respective weight then divided by the total number of recent immigrants aged 25 and older for the final score.

  • Migration of U.S. Knowledge Workers (Average Educational Attainment of Recent Migrants from Other U.S. States): Full Weight (~3.64 Points)
    Notes: The educational attainment of recent migrants aged 25 and older from other states within the U.S. (“moved from a different state”) is classified as having either no high school diploma, a high school diploma (or equivalency), some college experience or an associate’s degree, a bachelor’s degree, or a graduate or professional degree. Each degree class was assigned a weight based on the equivalent average years of schooling the U.S. education system would require for the level of educational attainment:

    • 0 for no high school diploma,
    • 12 for high school diploma,
    • 14 for some college experience or an associate’s degree,
    • 16 for a bachelor’s degree, and
    • 18.95 for a graduate or professional degree (the average number of years of schooling of the U.S. population of graduate, professional, and doctorate degree holders)

    The number of recent immigrants in each education class was multiplied by its respective weight then divided by the total number of recent immigrants aged 25 and older for the final score.

Innovation Potential – Total Points: 20

  • Percentage of Jobs in High-Tech Industries: Full Weight (~2.86 Points)
  • Percentage of Jobs Held by Scientists and Engineers: Full Weight (~2.86 Points)
  • Number of Independent-Inventor Patents per 1,000 Working-Age Residents: Full Weight (~2.86 Points)
  • Industry R&D Investment Amount per Total Civilian Employed Population: Full Weight (~2.86 Points)
  • Nonindustry R&D Investment Amount as a Percentage of GDP): Full Weight (~2.86 Points)
  • Venture-Capital Funding per Capita: Full Weight (~2.86 Points)
  • Entrepreneurial Activity: Full Weight (~2.86 Points)

 

Sources: Data used to create these rankings were collected from the U.S. Census Bureau, Bureau of Labor Statistics, U.S. Department of Commerce Bureau of Economic Analysis, Deloitte, U.S. Chamber Institute for Legal Reform, State Budget Solutions, CoreLogic, U.S. Patent and Trademark Office, The National Science Foundation, National Venture Capital Association and Ewing Marion Kauffman Foundation.