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A new report by the Fraser Institute makes clear what most Kentuckians already know: the commonwealth remains mired in the bottom half of American states when it comes to economic freedom.
Kentucky’s neighbors, meanwhile, have climbed. Indiana and Tennessee are in the top tier of states in terms of permitting the broadest range of economic choices for their residents.
The costs to average Kentuckians are clear. States in the top quartile of economic freedom see population growth nearly 18 times faster than the least-free states. Their statewide personal income grows nine times faster. Their residents experience less poverty, less food insecurity, and less homelessness. If Kentucky wants to stop losing residents and businesses to more free states, lawmakers must take the Fraser Institute’s findings seriously. The solutions are straightforward.
Government spending is KY’s weakness
Kentucky’s most significant drag on economic freedom is government spending, particularly transfers and subsidies as a percentage of income, which are the fifth highest in the country.
Kentucky is the second-most federally dependent state in the nation. For every dollar Kentuckians pay in federal taxes, they receive $3.35 in federal funding — a ratio that sounds advantageous but actually reflects an economy dependent on federal largesse.
Over 38 percent of Kentucky’s state and local government revenues come from federal transfers — nearly 12 percentage points higher than the national average.
Most of this flows through Medicaid, which now covers roughly one in three Kentucky residents following the Affordable Care Act expansion. While ensuring healthcare access matters, this level of dependency crowds out private-sector growth and makes Kentucky vulnerable to federal policy changes.
The path forward isn’t to abandon those in need but to grow the private economy faster. Workforce development initiatives that move able-bodied adults from dependency to employment, occupational licensing reform that removes barriers to work, and welfare-to-work programs with appropriate support services can reduce transfer dependency while improving lives.
Taxes: Progress Made, More to Do
Kentucky has made meaningful progress on taxes. The top marginal personal income tax rate has fallen from 6 percent in 2018 to 4 percent today.
However, more could be done. The state’s payroll and income tax revenue remains high relative to state resident income. It was the 11th highest in the nation as of 2023, the latest year for which we have comparable data. Hopefully, the state’s lower income tax rates will improve this.
Kentucky also remains one of only six states levying an inheritance tax. While this “death tax” generates relatively little revenue, it ranks Kentucky dead last and drives wealth and business succession planning across state lines. Repealing the inheritance tax would immediately improve Kentucky’s competitive position.
Labor market freedom
Labor market freedom represents Kentucky’s strongest category, thanks largely to the right-to-work law enacted in 2017. Kentucky now ranks first among states for right-to-work status, first for maintaining the federal minimum wage floor without state additions, and fifth for workers’ compensation costs. These policies give Kentucky a genuine competitive advantage in attracting manufacturing and logistics operations.
Yet opportunity remains. Occupational licensing reform — reducing unnecessary barriers to work in dozens of professions — would improve labor market freedom while expanding opportunity for Kentuckians. Kentucky can improve its labor freedom by reducing credential requirements that protect incumbent workers rather than public safety.
More broadly, the state needs to check the growing problem of regulatory accumulation. In a forthcoming report for the Bluegrass Institute, Hoover Institution Fellow Patrick McLaughlin finds that restrictive language in Kentucky’s regulatory code — words like “shall” and “must” — has grown twice as fast as in the median state. Drawing on lessons from others like Idaho, Virginia, and British Columbia, he notes that regulatory restraint can unleash significant new economic growth.
The stakes are clear
Nearly 1,000 peer-reviewed studies have built on the Fraser Institute’s research. This literature demonstrates that economic freedom correlates with higher incomes, faster growth, more entrepreneurship, better labor outcomes, cleaner environments, and even greater life satisfaction. States like Idaho, North Carolina, and North Dakota that significantly increased economic freedom over the past two decades have dramatically outperformed states that moved in the opposite direction.
Kentucky can join the ranks of these “liberator“ states. The roadmap is clear: continue reducing income taxes toward elimination, repeal the inheritance tax, reform occupational licensing, and pursue policies that transition Kentuckians from government dependency to private-sector prosperity.
Kentucky’s neighbors have shown it can be done. Tennessee’s abolition of its income tax, combined with disciplined spending and labor market freedom, has made it one of the fastest-growing states in America. Kentucky can follow — but only if state leaders have the courage to embrace economic freedom as the foundation for future prosperity.
Matthew D. Mitchell is a Senior Fellow in the Centre for Human Freedom at the Fraser Institute. Caleb O. Brown is the CEO of the Bluegrass Institute.
This piece originally appeared in the Lexington Herald-Leader.
