Out of Control Policy Blog

A Tale of Two States: Texas vs. California

Having had the pleasure of living several years in Houston earlier this decade, I was constantly amazed at the many things that Texas gets right that other states routinely bungle (see here, for starters). Friends' eyes have been known to glaze over as I tell them that cities like Houston and Dallas are poised to be the powerhouse cities of the 21st century, and in tandem, that Texas is going to blow away most, if not all, other states in economic performance in the next few decades.

There's no one thing you can point to to explain Texas' competitive advantage. In my estimation, the late Ric Williamson summed it quite well in this 2007 Reason interview:

We are a very low tax state, we're a very low regulation state, and we have a very limited welfare system in our state. What that means is, individual entrepreneurs want to live in Texas because they don't pay any income tax. Businesses want to locate in Texas because they're not overly regulated. And people don't come to Texas for welfare because none exists. So people who show up in Texas show up to work, generate wealth, and contribute to the overall economy.

One cannot say the same thing about California, in many ways Texas' polar opposite. You couldn't have two states moving in more opposite directions. One is unabashedly pro-growth and aggressive in courting industry, while the other seems content to spin an ever denser spider web of laws, regulations and red tape that is driving business out of the state. One state accounts for a whopping 70 percent of all jobs created in the United States last year, while the other seems bent on increasing taxes on business and individuals to pay for an unsustainable, out of control government that wants to be everything to everyone despite the fact that it simply cannot.

This doesn't mean that Texas doesn't face very real problems in the current recession: they do, as Brendan Case at the Dallas Morning News blogs here. But even so, the silver lining for Texas is that the recession will nick the Lone Star State while it gouges the Golden State. California's addiction to funding ongoing programs through debt financing, its permanent structural deficits on the horizon, its fondness for taxation, and other governance weak suits will really hamper the economic recovery in the state, ensuring it will occur long after Texas is off to the races.

Hence, it's good to see a direct Texas vs. California comparison drawn out in the American Legislative Exchange Council's updated Rich States, Poor States report. The full report is worth a read, but I found the comparative analysis of tax and regulatory climate between the two states to be particularly illuminating. Here's the takeaway:

Matched up in a head-to-head competition, Texas’s economic environment beats California’s – in fact, it is a knockout. [...] California continues to increase regulations, raise taxes and spend profligately. These anti-growth policies will continue to sap the economic vitality of California. Texas, on the other hand, has a pro-growth economic environment with a competitive tax system, sound regulations and spending discipline that will help Texas maintain its superior economic performance well into the future.

And even though one might think it would be intuitive by now, it's still helpful for policymakers to hear this one more time:

In the long run, there is no trade-off between healthy government finances and a competitive business environment. After all, punitive tax rates don’t bring in much money when businesses relocate to other states.

» Reason's Government Reform Research and Commentary

Leonard Gilroy is Director of Government Reform

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Comments to "A Tale of Two States: Texas vs. California":

Steve Titch | March 26, 2009, 10:47am | #

All good points, Len. As a transplant from Illinois now living in Texas, the difference in economic climate is plain. What has me worried is that the current administration and its allies see the more prosperous states as ripe for plundering (exhibit one: emissions tax) to rescue the fiscally irresponsible states.

John Kaliski | March 26, 2009, 9:58pm | #

I have not of course read all the background research, but I do wonder what type of economy the State of Texas as a whole is creating for the late 21rst Century. A fossil fuel economy, an economy of beltways and suburban infrastructure? Having lived there, and it was fun, it did not seem particularly creative, creative types were marginalized in Houston even as they were an important part of the dynamism of the scene, the pollution and environmental degradation was significant and growing and has still not really been addressed, the poor were really poor and ignored, the education system, especially at the secondary level and even at the University level was spotty with only a very few bright spots. California does have real problems and real reform, especially economic reform, is required, but as a place to live the quality of life is much higher, the sense of innovation much greater, the educational system at the university level much greater, the diversity and acceptance of diversity much greater, and of course the weather sweeter. I think it is possible that California will reform from within faster than Mr. Gilroy believes it will; it has little choice precisely because the problems he mentions are real. However, it will be based on a different paradigm that in part at least is based upon an attempt to discover and leverage shared as opposed to individual values.

Dave | March 27, 2009, 12:35pm | #

I can't speak for Texas, but as a lifelong Californian it's a bullseye for us. Our state is pathetic, pathetic, pathetic. My confidence was shaken in 2005 when voters rejected every single one of Arnold's reform proposals to cut out state waste and leash the unions. But it was broken last year when we approved a mind-boggling $10 billion bond sale to build high-speed rail that will cost at least four times as much, that the laws of physics dictate will not perform as well as planned and that will require operating subsidies forever. We voted to spend this obscene amount during our worst fiscal crisis ever (and in California, that's really saying something) and when you can fly round trip from LA to SF for under $100. The voters did all these things through initiatives, mind you, so I can't even blame the stupid politicians and gerrymandering (which we certainly have in spades). It's really painful to walk down the street and know that the majority of the people you look at made these foolish decisions. It makes it hard to be a happy person when your surrounded by such feebleness.

mark | March 27, 2009, 12:49pm | #

I love Austin, but I've been to Houston, a city with very little zoning and planned growth, and it's a smoggy, sprawling mess. Texas also has a backwards public education system with years of "abstinence-only sex-ed" resulting in one of the highest teenage pregnancy rates in the country. Still, like I said, I love Austin and would never want to live anywhere else.

mark | March 27, 2009, 12:52pm | #

And a very good infrastructure proposal, the Trans-Texas Corridor, will likely go nowhere due to the nativist sentiment which often dominates here.

Len Gilroy | March 27, 2009, 1:08pm | #

mark: On Houston, I have to respectfully disagree. I found it to be an unexpectedly vibrant and dynamic city with abundant opportunity (which is why it is indeed an economic powerhouse).

However, on the nativist sentiment related to privately financed toll roads, I'm in complete agreement (see here, here, and here. In fact, an upcoming blog post will match Texas vs. California again on the issue of privately financed infrastructure/PPPs. Suffice to say that Texas seems bent on moving in the wrong direction, while California is starting to dig its way out.

Dan | March 27, 2009, 4:50pm | #

Nice comment, Len. It will be interesting to see where Florida goes. Politically, Florida is like the love-child of Texas and California, with aspects of both jumbled together without the extremes. The crunch has put Florida politics on a stranger than usual bipolar track.

And my take on Austin is that a red state can support a blue "star" (capital) but the reverse does not happen. Pick a blue state, it's capital is only bluer.

Susan Mauriello | March 28, 2009, 12:29pm | #

I live in Texas and will never leave. I am a libertarian and I love REASONable people. I want to do more to help the Lib party but have no cash. I am going to look into this more.

mark | March 29, 2009, 9:13pm | #

I just mentioned Houston to stir the pot a bit. As much as "zoning" and other measures are anti-liberty in many ways, it just seems like a huge waste of resources to have such a spread-out city. When high oil prices return, the dependence on automobiles will strangle a city.

Erik | March 30, 2009, 2:29pm | #

Here is another important statistic. Since the end of the last recession (2002) Texas has outpaced California when it comes to growth in personnel income and in per capital personnel income according to the BAE. Thus not only have they GROWN faster but, consistent with what we would believe as libertarians, incomes of the majority of Texans has risen faster. This is an important point to drive home as often as possible - not just growth for growth's sake but growth because it means the majority of citizens are better off today than they were yesterday.

Erik | March 30, 2009, 2:34pm | #

Oh and I can not let the Green "sprawl will kill em, just watch" point go unanswered. This is just horrific static economic thinking. "Anti-sprawl" measures are not saving NYC, America's most transit friendly and anti-sprawl metro region. Ditto Portland. Government may "help" with its right hand residents on transportation expenses but if it takes away more with the left than the overall purchasing power is reduced and economic activity suffers. Moreover, it imagines that Texans will be static and not adapt (telecommuting, more businesses trying to get services closer to consumer, etc) to higher fuel costs to minimize impact on personnel bottom line. Note, Texas because of its more freemarket regulatory regime is more likely to be able to quickly respond. Contrast to California where a retailer seeking to put up a small shop in a residential neighborhood to serve in a more proximate way local consumers would likely need to spend hundreds of thousands of dollars for the just the required enviromental studies.

Mitch | March 30, 2009, 10:32pm | #

We need real pressure on taxes on flights and other travel to be lowered or eliminated. That will make a big difference in lowering all taxes worldwide. Let people vote with their feet and see what they really think of taxes.

DRM | April 2, 2009, 4:21am | #

Your comments on the state of California's leadership are on point. However, what accounts for the disparity between mean incomes in each state: Calif. (2001) 32,655 vs Texas (2001) 28,432? Median same year: Calif. $46,802, Texas $39,842. Texas is below the national average on both measures. California also has more income earners and possibly a greater range of earnings, but still paces Texas and the US. What do excess regulations say about this? Apparently more wealth is still generated in California and it is also dispersed more evenly than in Texas. Firms locate in California and the state still creates high paying jobs despite more regulations and, I will admit, a harsh property and income tax structure.

MB | May 4, 2009, 12:13pm | #

DRM- I live in the SF Bay area. Your comment about CA residents having a higher median/avg income is true - yet very misleading. The purchasing power of CA residents is much lower. Typical 4/2 house with 2400 sqft in a good neighborhood with above average public schools will run you in excess of 1m+ (easy). Plus, on top of that Texas has no state income tax, and CA has the nations highest now. We even just instituted a tax on top of the state tax, in the form of surcharge. My wife and I make 330k per year combined, and we'll be leaving this state in the next 18 mons. The oppresive taxes and regulations are forcing younger producers out.

Houston native/resident | June 18, 2009, 2:25pm | #

If it were up to me we'd close off the city limits to the idiots moving in here from everywhere else seeking jobs. We didn't need them before, and we don't need them now. The bottom line is that Houston is different. If I had a dime for every selfish Californian or New Yorker that moved here in search of a job, who then tries to espouse their version of how CA or NY is better, well then I'd be rich and all that. So take some advice from a native Houstonian. Be polite, keep your mouth shut, and remember, that pretty much everyone carries a pistol here. Leave your smugness in yankeeland or lalaland.

Have a nice day ya'll.

DFG | June 18, 2009, 2:37pm | #

To all Californians:

Please do not believe a word of this article. Life is terrible here in Texas. The climate is much too hot and humid for you to take. It's also tough that we Texans prefer to work in private sector non-union jobs. Percentage wise, we have fewer overpaid state, county, and city government employees and fewer government union employees. Stay away!

AllenDB | June 18, 2009, 6:06pm | #

Ran across this article and it reminded me of what I wrote more than 4 years ago. http://www.freerepublic.com/focus/f-news/1377367/posts Buried in the article I said Cal is in Big Trouble. I just could not have imagined how big, I just knew it was big.

LA | June 18, 2009, 9:47pm | #

Anyone who thinks that TX is in ANY WAY better than CA is either a cowboy or has never been to CA. End of story. CA has a lot of things to offer that Texas never will. For example, our universities are some of the top in the WORLD. People from all over the world dream that ONE DAY they might go to UCLA. Nobody even knows that Texas has schools. CA is a diverse state and no matter what you say about Texas having all the jobs, it doesn't have as much opportunity as CA, specifically LA. End of story.

RickRussellTX | June 18, 2009, 11:23pm | #

"comment about CA residents having a higher median/avg income is true - yet very misleading. The purchasing power of CA residents is much lower."

Yet it shows clearly that business is not fleeing the state.

The statements about education are on-point. Texas has a few private university stars (I'm a Rice '92 graduate), and a couple of solid state institutions.

You can't take two steps in NorCal or SoCal without stepping on a USNews top national university. Four are in the top 25, with nearly 100000 undergraduates enrolled. And they are all as strong in research as they are in undergraduate education.

Keep going down the list; U. of Texas comes in at number 47, behind FIVE MORE massive California schools, including USC. The CA schools make up 9 of the top 50, and by enrollment they make up a much larger percentage with *hundreds of thousands of students*. UT and Rice between them number about 65000 undergrads.

I love Rice, but I'm realistic. Its few hundred graduates per year are not going to lead Texas ito a new golden age and help it compete with rock-bottom labor costs in Mexico, South America and China.

As for myself, I lived in Texas all my life until I took a job out here, and saw a pretty instantaneous 25% increase in pay. I can say with certainty that the opportunities here are big, if you can hack it.

I'll close with the imprint at the bottom of Reason's web page:

"3415 S. Sepulveda Blvd. Suite 400 Los Angeles, CA 90034 (310) 391-2245"

Ah well, hypocrites come in all shapes and sizes.

Matthew H./Texas | June 19, 2009, 9:13am | #

Not to mention that TX is tough on crime compared to LaLaLand. Capital punishment means the death penalty in TX. If you kill someone here, we kill you back.

James R. | June 19, 2009, 11:55am | #

Having lived in both states i have to say Texas is a better place to work and live. The pace in texas is slower and you dont feel as tense as I did in California. As to the pay, I took a pay cut to move to Texas but had more buying power. A 5k a month job in Texas pays for evrything with extra to save, a 5k job in Cali makes u get another job to pay the bills.

Reuben B. | June 20, 2009, 9:50am | #

Another thing nice about Texas: most of the gays are concentrated in a just few places, not spread all over the place like California.

VJ in Dallas | June 21, 2009, 3:30pm | #

Note to RickRussell: WTF are you talking about? Rice, Baylor, A&M, TCU, SMU, Univ of Dallas and UT are world class institutions that actually teach students to be productive, versus most of the California institutions that teach liberal babble. For example, Univ Cal-Berkley is almost a laughing stock among the business community.

F U, LA | June 26, 2009, 8:51pm | #



All of these people you speak of, who one day want to come to L.A., have never, ever BEEN to L.A. It's very easy to romanticize a hostile, overcrowded cesspool when you're half a world away...and the only access you have to the place is the polished media product that exists only so that the producers can feel better about the horrible life choice that they made.

CA has more to do, but you'll never get to do it, because you'll be sitting in traffic. And when you get there, you won't find any parking. Or, maybe you won't even be able to go in the first place, because the only way to afford the over-priced rent is to work yourself to death, 18 hours at a time, 6 times a week.

Oh, but you'll make a lot of contacts, though.

End of story.

F U, Los Angeles.

CA SUX | June 27, 2009, 10:06am | #

California just got safer for all the little boys with MJ's passing. What is it about CA that attracts weirdos like him?

William | August 6, 2009, 3:48pm | #

Personally, I would be grateful if Californias and New Yorkers would invade other state to occupy until the next trend. In the meantime, if you do happen to visit Texas, don't say you are from either state since there are a lot of native Texans fed up with the do-good-happy-times attitudes!

AJ | October 4, 2009, 4:51pm | #

I was in CA for my whole life and moved to Dallas from the SF bay area as my company moved. I have to say that the no state income tax is definite benefit and housing costs are way lower. I do miss the awesome weather and natural beauty but its not something that can really be quantified in an economic argument. My biggest gripe with Texas really has to be the attitude of some of the locals. Being close minded and shunning any argument from a blue state native is not going to attract the sort of well educated and creative people that create wealth and innovation. Texas may become the manufacturing powerhouse but the pitfalls of such a change are already evident. Pollution and environmental damage are externalituies that politicians and Texans love to ignore. Plus education is appalling and continued emphasis on creationism in schools really distracts from emphasis on maths and sciences.

To summarize, Texas is well poised and well endowed to be the new golden state for the coming few decades. But unless a real emphasis is placed on education and environment, this growth will sputter to a halt. keep in mind that all the transplants from CA and NY plus hispanics will most likely turn TX into a blue state in a decade or so.

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