Texas Vs. California: Wide Gap In Policy Opposites

By ARTHUR B. LAFFER

Rick Perry has again invaded the turf of Jerry Brown. I personally have advised both governors — including when each ran for his party’s presidential nomination — and can attest to their character. Both are honest, intelligent, well-meaning, experienced and energetic, with unique styles who have come to represent the two states with greatest gravitas.

Both have also evolved to the point where they represent the policy extremes. But their stories should be likened less to sports rivals than to competing training regimens. We’re all on the same team, but not all regimens produce equally proficient athletes. And nowhere can competing economic models be put to the test more than in the crucible of U.S. states.

Based on my research, the effective marginal state and local tax rate on a unit of economic activity in California is about 65% higher than it is in Texas. This calculation includes higher personal, corporate and capital-gains taxes in California and their low level or absence in Texas.

Texas has lower but still substantial sales taxes, workers’ comp contributions and other fees and taxes, while California has lower property-tax rates. Texas is a right-to-work state; California is not.

There are also differences in minimum wages and many regulations and fees. Texas actively encourages oil and natural gas exploration while California does not.

And so it goes — truly polar examples of economic policy.

With higher tax rates, it’s no surprise that wealthier people have disproportionately been moving out of California and moving into Texas. It’s also plain that a larger share of Texas’ population chooses to join the labor force. And of those in the labor force, more are employed in Texas than in California.

And, of course, higher tax rates incentivize more tax avoidance (perhaps even evasion) in California than in Texas.

California’s higher tax rates, however, do not result in equally as large tax revenues vs. Texas. In fact, tax revenues per dollar of California income are only about 25% greater than Texas’ tax revenues. This is fiscal leakage No. 1.

California, moreover, dissipates even that 25% revenue advantage through regulations, restrictions, requirements and mandates. With prevailing-wage clauses required in state contracts, environmental impact statements, bureaucratic delays, engorged oversight and all variety of enforcement infrastructure, California actually ends up spending about the same share of state income on public services as Texas.

From 65% higher tax rates to 25% higher tax revenues, California is now even with Texas when it comes to spending on public services as a share of state GDP. This is leakage No. 2.

In other words, due to the presence of these incredible fiscal leakages, the oft-repeated incantation that the “Texas model” results in a lack of quality public services falls flat.

Instead, the data bear out that Texas not only grows faster and attracts more people and businesses by creating greater incentives for citizens to produce, save and invest, but also provides the same level of government spending on public services such as roads, education, health care, police, fire, etc.

But there’s more.

State and local governments aren’t like private businesses. They can operate inefficiently, or even at a loss, simply because there’s no competitor to undercut their inefficiencies and provide better services at lower cost. And when state employee unions can, through the political process, take control of state government, costs for the same services soar. It becomes harder to demand or monitor state standards, and firing an employee is all but impossible.

The single largest contributor to political campaigns in the Golden State is the California Teachers Association, followed by other state and local government employee unions.

In Texas, on the other hand, labor organizations have much less influence on state politics. As a consequence, wages per full-time equivalent employee in California are a heckuva lot higher — across the board.

With higher costs and wages per worker, and the same dollars spent per dollar of state output, California badly trails Texas in the provision of public services per 10,000 of population. Whether it’s schools, police, fire, highways or hospitals, it’s the same story: Texas does much better than California. This is leakage No. 3.

In education, the single most important function of state and local government, student test scores administered by the U.S. Department of Education show Texas ranks a little above average among the 50 states while California remains stuck in the bottom five.

The same story holds for highways. And when it comes to poverty as a share of population, Texas has a lot less of it than California.

As this comparison makes clear, the economic policies that work best at the state level are those that promote growth. Many states — from Texas and Kansas in the heartland to Wisconsin, Ohio and Michigan in the Midwest to Florida and Tennessee in the South and New Jersey in the Northeast — are embracing this model.

The more states that move toward this training regimen, the better off all Americans will be. The issue of good governance isn’t about personalities or ideologies; it’s about results. Raising taxes is not the answer to any question.

Laffer is chairman of Laffer Associates and a board member of Americans for Economic Freedom, a nonprofit group for pro-growth state policies.

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