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A Tale of Two States: Texas vs. California

Leonard Gilroy
March 25, 2009, 8:47pm

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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