The big forces bearing down on state economies in 2026 — trade uncertainty, stubborn inflation, swelling national debt, rippling AI disruptions — mostly emanate from Washington and boardrooms, not state capitols. No governor sets tariff schedules. None votes on the federal budget, steers interest rates or decides how tech reshuffles local labor markets.

Yet states aren’t powerless. They don’t control shocks, but they can build shock absorbers. The latest research shows how economic freedom allows them to take a punch and keep moving.

The Fraser Institute's “Economic Freedom of North America” report measures each state government’s size, taxes and labor-market flexibility — choices their legislatures make for themselves. For the 24th time, New Hampshire is the freest, followed by Tennessee, South Dakota, Texas and Idaho. At the other end sit New Mexico, New York, Hawaii, and California.

These choices matter even when the shock is national. Any big economic change forces rapid reallocations: Some workers must change jobs; capital must flow where it's suddenly needed; businesses must adjust prices, payrolls and plans. Policies that slow these adjustments turn temporary blows into lingering ones.

For example, punishing state taxes are essentially taxes on adapting. California (which ranks 48th in the Tax Foundation's State Tax Competitiveness Index) is the only state that doesn’t permit a business that makes a loss in one year to apply it against profits in future years. A firm trying to absorb a shock is taxed as if nothing has gone wrong. Nor does it permit a business that is attempting to retool to account for the costs of new equipment as these costs are incurred.

It can also mean rigid labor rules. Oregon imposes America’s heaviest occupational-licensing burden by the Archbridge Institute's count, a thicket of permission slips that keep displaced workers from moving into new trades.

Freedom, in this sense, is the capacity to adapt quickly.

When economists Justin Callais and Jamie Bologna Pavlik examined how American metro areas weathered the Great Recession, they found that economic freedom accompanied higher levels of employment and incomes. Strikingly, areas that had increased this freedom in the preceding years recovered faster than otherwise-comparable areas. Michael Walden documented how states that raised income and corporate taxes saw slower growth and slower job recovery.

Now, apply the idea to our present-day challenges:

The steep price and high uncertainty of on-again, off-again tariffs has raised input costs and scrambled supply chains. Responding quickly depends partly on where a business operates. Manufacturers in freer Texas, Tennessee or Florida can re-source inputs, adjust prices, and restock workforces with less friction than those navigating California's tax code or Oregon’s licensing rules.

AI disruption demands the same thing. States that let workers retrain, switch occupations and start businesses without government permission slips can ride the transition rather than fight it. It’s no wonder capital is already moving that way. Texas now hosts one of the country's largest concentrations of AI data-center investment.

Inflation erodes real incomes everywhere, but lighter tax burdens — also found in Texas, Tennessee and Florida — leave households and businesses more of a cushion.

Federal debt will soon begin to crowd out the money sent to states. Those that keep their own fiscal houses disciplined won't be caught leaning on a backstop that may not arrive. Jack Salmon's Fiscal Resilience Ranking finds Texas best positioned to absorb a pullback in federal aid, while New Mexico is the most exposed.

None of this requires anything heroic. That's the underappreciated part. The freest states didn't out-spend or out-subsidize their rivals — they did the quiet, unglamorous work of getting out of the way and letting individuals and firms do the adapting.

Tennessee abolished a tax on investment income. New Hampshire just eliminated its tax on interest and dividends. And as a recent Fraser report documents, Idaho became an economic freedom success story not through a single grand initiative, but through decades of steadily reduced tax burdens, restrained government growth and expanded economic choice.

Economic freedom is not a forcefield. Any state can be hammered by a deep enough national recession. Nor is freedom the only thing that matters. Geography, industry mix, culture, demographics and even luck play a role. But policymakers can’t control all of this. They can control barriers to work, investment and entrepreneurship. Economic freedom improves the odds of bouncing back.

Improving odds is a large part of what governing is. States spend enormous energy lobbying Washington over forces they cannot command. But when the next shock lands, the ones that have always made room for their citizens to adapt will be standing tallest.

____

Meg Tuszynski is the managing director of the Bridwell Institute for Economic Freedom in the Cox School of Business at Southern Methodist University.

Matthew D. Mitchell is a senior fellow in the Centre for Human Freedom at the Fraser Institute and senior affiliated scholar at the Mercatus Center at George Mason University.

_____

©2026 Tribune Content Agency, LLC.