Kentucky continues to improve economic freedom ranking, still lags neighbors

By: Molly Rovinski

Earlier this November, the Fraser Institute released its Economic Freedom Report for 2021, which compiles data for the year 2019. The report ranks the 50 states on overall economic freedom as well as three subcategories: (1) government spending, (2) taxes, and (3) regulation. Over the last decade, Kentucky has consistently ranked in the bottom quartile in the overall score. However, Kentucky has been improving since 2010 – when our overall score was 4.69 out of 10. In the most recent report, Kentucky emerged from the bottom quartile for the first time this decade and was ranked 37th, with an overall score of 5.60.

Kentucky received its lowest score in government spending (4.09), ranking 49th in the nation behind Alaska. The government spending category includes three sub-metrics: general consumption expenditure as a percentage of income, transfers and subsidies as a percentage of income, and insurance and retirement payments as a percentage of income. Unsurprisingly, Kentucky’s lowest score among these three subcategories (2.32) was for transfers and subsidies as a percentage of income—likely a product of Kentucky’s steadfast reliance on government subsidies such as Medicaid, which 35% of Kentuckians currently benefit from.

Kentucky ranked 23rd, up from 25th in 2018, for taxes. This category calculates the percentage of income dedicated to property and other taxes, sales tax revenue, and income and payroll tax. The Commonwealth received its highest score (9.07) in this category for property and other taxes as a percentage of income. A Tax Foundation ranking of the states based only on property taxes found Kentucky had one of the lowest effective tax rates, ranking 31st in the nation at 0.78%.

Among the three key metrics used for this analysis, Kentucky received its highest score in regulation, ranking 21st with a score of 6.48. This year’s score is the highest that Kentucky has ever received in this category since the Fraser Institute first released its Economic Freedom Report in 1981. The regulation category considers three sub-metrics: minimum wage, government employment as a percentage of total state/provincial employment, and union density.

Despite modest progress, Kentucky lags far behind its neighboring states. Tennessee, for example, ranked 2nd in the nation, followed by Virginia at 5th, Indiana at 11th, and Ohio at 35th. The only exception is West Virginia, which ranked behind Kentucky at 47th with an overall score of 5.0.

Although Kentucky has made improvements in each category and its overall ranking, the Commonwealth has a lot of room to improve to ensure that all Kentuckians experience the economic freedom they deserve.