South Dakota has quietly established itself as arguably the most successful state in the Greater Midwest. In a comprehensive Cato Institute study that we co-authored, we reveal exactly why: freedom, especially economic freedom.

South Dakota has a very low combined state and local tax burden (7.4 percent of income), and, of course, no state income tax. In most years, local governments collect more tax revenue than state government does. That makes it easier for citizens to choose a city or county that provides the right mix of services relative to taxes.

Not only are taxes low, but the state government has also been fiscally responsible, with cash on hand well exceeding total debt. South Dakota is one of a handful of states with AAA sovereign bond ratings from every ratings agency.

Further, regulatory burdens are low. Property owners have a lot of freedom to build, with relatively light local land use regulations, no rent control, no mandatory affordable housing set-asides (which make housing in general more expensive), and eminent domain reform. Apart from a minimum wage, labor markets are flexible and pro-employment. Licensing barriers are also low. Medical facilities, for example, can open without getting a certificate of need.

In terms of lifestyle, gun rights are secure, alcohol laws are generally reasonable, several forms of gambling are allowed, and private- and public-school choice programs are available. If South Dakota wants to do even better, they could jump on the universal school choice bandwagon sweeping the nation, ease home school regulations, reform civil asset forfeiture, and reduce arrests and sentences for victimless crimes.

Good actions have good consequences. South Dakota has attracted more Americans this decade than any other midwestern state. And except for North Dakota during the shale oil rush of the 2010s, it has also outpaced every other midwestern state since 2000.

In 2022, South Dakotans’ real personal income grew by 1.6 percent, the third-best mark in the entire country. (In the U.S. as a whole, real income fell by over four percent.) Over the period since the Great Recession of 2008, the only state in the Greater Midwest with a better growth record is oil-rich North Dakota.

“There’s no virtue like necessity,” goes the maxim. Frankly, South Dakota needs economic freedom to compete. While parts enjoy rich soils, the state doesn’t otherwise have the mineral resources of, for instance, North Dakota or Wyoming. The favorable business climate has been critical to attracting and fostering enterprise in information, biotechnology, distribution, trade, agriculture, and food processing. For example, Sioux Falls digital financial media company MarketBeat has made the Inc. 5000 list of the fastest-growing companies in America for eight straight years, something fewer than one percent of firms on the list achieve.

Unfortunately, the ballot initiative has threatened South Dakota’s tremendous achievements. Direct legislation enables a tyranny of the majority—and unintended consequences. The minimum wage is perhaps the most significant example in the realm of public policy. In the new year, South Dakota’s mandated rate will move up to $11.20 an hour, well above the federal minimum of $7.25 and the national state average this year of $10.28 that includes high-cost states like New York and California.

A minimum wage sounds good to many voters, but the real minimum wage is always zero. That’s because you can’t force employers to hire workers. Studies have routinely found that minimum wage laws negatively impact less-skilled workers by eroding employment opportunities and increasing employer incentives for technological substitutes.

New Hampshire has no state minimum wage, but it has the highest average wage in the country. A marketplace unencumbered by regulation and other forms of government intervention has markedly raised personal income.

Back in 2007 to 2010, South Dakota was number one in freedom. The fall to number three today is a result of other states’ pulling ahead rather than policies’ getting worse in South Dakota. Still, policymakers in South Dakota need to be vigilant about staying ahead of the pack.

South Dakota’s secret recipe for success is economic freedom. More states should take notice.