Texas Beats California on Economy

NOV. 18, 2010

By JOHN SEILER

In the competition between America’s two most populous states, California has two recent victories over Texas. In the World Series, the San Francisco Giants stomped on the Texas Rangers.

And on election day, Nov. 2, the Silicon Valley venture capitalists who funded the campaign opposing Proposition 23 trounced the Texas Oil Companies’ Dirty Energy Proposition, as it was branded, when Prop. 23 lost at the polls, 61 percent to 39 percent. Prop. 23 would have suspended AB32, the 2006 Global Warming Solutions Act. Reported George Gilder:

Led by [California resident] Al Gore’s investment affiliate, Kleiner Perkins Caulfield and Byers, the campaign to save AB32 raised $31 million—more than three times the $10 million that the [Dirty Texas] oil companies raised for repeal. Pouring in millions were such promethean venturers as John Doerr and Vinod Khosla of Kleiner Perkins, Eric Schmidt and Sergei Brin of Google, and the legendary Gordon Moore and Andrew Grove of Intel. The campaign even managed to shake down a contribution from the state’s public utility, Pacific Gas and Electric, and gained the backing of the GOP’s eBay billionaire gubernatorial candidate, Meg Whitman.

So, California seems to be on a roll.

The problem is that, aside from tax-subsidized green technologies, the top Silicon Valley companies and Hollywood, California’s economy is doing much worse than Texas’, according to a new study by the Texas Public Policy Foundation, a think tank in Austin.

“Competitive States 2010: Texas vs. California, Economic Growth Prospects for the 21st Century,” was written for Arduin, Laffer & Moore Econometrics by four scholars:

* Donna Arduin, Gov. Arnold Schwarzenegger’s first budget director, back when he was balancing budgets; so she well knows California’s budget situation and economy.

* Arthur Laffer, the economist who helped design California’s Proposition 13 tax cuts in 1978, Ronald Reagan’s tax cuts in 1980 and Jerry Brown’s flat-tax proposal during the 1992 presidential primaries.

* Stephen Moore, an economist now an editorial writer with The Wall Street Journal.

* Wayne H. Winegarden, an economist and manager of policy studies and analysis at Arduin, Laffer & Moore.

I talked to Winegarden about the study.

Texas’ economic advantage

The study found:

Even amid the country’s worst economic setback in decades, our updated analysis shows that Texas’ competitive edge over California remains sharp. … Like the rest of the nation, Texas’ economic growth hit a serious speed bump during the great recession. But, its economic decline in the state has been milder than in California and the rest of the country. The Texas economy has been growing stronger, with less negative volatility, than California or the nation overall.

Shockingly, the study noted, in the past year Texas created 129,000 new jobs, half of those created in America, even in the midst of the worst of the worst recession since the Great Depression — even as California lost 112,000 jobs.

What’s going on?

“There are a lot of reasons,” Winegarden told me. “Policy is one of them. The progressive income tax system in California creates a lot of volatility.” By contrast, he said, in Texas there is no income tax, therefore less volatility. “A rigid tree will fall, but a more flexible tree can bend.”

The volatility problem long has been noted in California, such as by this 2005 study from the Legislative Analyst’s Office. What happens is that, because of the progressive income tax with its current top rate of 10.55 percent, in good times massive amounts of revenue are generated, as during the dot-com boom of the late 1990s and the real-estate boom of the mid-2000s.

The Legislature and governor, assuming the good times never will end, then go on spending binges. In his first two budgets, for fiscal years 1999-2000 and 2000-2001, Democratic Gov. Gray Davis increased spending an unsustainable 15 percent per year — each year. Those also were the years of the bipartisan pension spiking, based on unrealistic expectations of unending stock-market increases, that have plunged the state into a $500 billion pension debt.

Republican Gov. Arnold Schwarzenegger was nearly as bad on spending in the mid-2000s, after he abandoned the moderate fiscal austerity of his first two years in office.

Texas likes business

Maybe nothing is a bigger contrast than the two states’ respective attitudes toward business. “Texas has a smaller tax burden and a smaller spending burden,” Winegarden said. “Also, its unions are less powerful and it regulates less. Texas has a smarter, more focused application of regulations. In California, it’s hard to get a housing license.”

The study looked at six areas of comparison. In only one area, taxes on consumption, is Texas as competitive as California. In all the other areas, Texas as has a significant advantage:

Taxes on Labor

Top Marginal Personal Income Tax Rate:

California: 10.55%
Texas: 0%

Taxes on Capital

Top Marginal Rate: Income, Capital Gains, Dividends:

California: 10.55%
Texas: 0%

Marginal Personal Income Tax (Average Income Earner):

California: 9.55%
Texas: 0%

Overall Tax Environment

Recent Legislated Tax Changes per $1,000 of Personal Income (2008 & 2009):

California: $115.96
Texas: $94

Government Spending Policies

Total State and Local Expenditures per Capita (2008):

California: $11,356.83
Texas: $7,763.49

Average Growth in State and Local Government Expenditures (2008):

California: 7.29%
Texas: 7.02%

The spending situation is worth noting. California spent $11,356.83 per capita, or 68 percent more than Texas’ $7,763.49. No wonder California’s budget now is $24 billion in the red.

And note that California’s tax on the middle class is 9.55 percent of income, almost as high as that on millionaires, 10.55 percent. Texas has no income tax.

Texas has no AB32

AB32, the global-warming law, “is a selling point for every other state,” Winegarden warned. A company can avoid its heavy burden just by leaving California, or not locating here in the first place.

He said that, to avoid chasing away businesses, AB32 implementation should be accompanied by lowering taxes on those businesses affected by the new regulations. Unfortunately, no such proposals are in the air.

And he pointed out that, ironically, if carbon-generating businesses leave California, there won’t be any “global” solutions implemented; the carbon emissions will just be relocated to another state, along with the associated jobs.

Revitalizing the California mystique

Despite the negative comparison with Texas, California still has some positives, beginning with the weather. The study found:

A 2009 survey of American top-level executives published in Chief Executive Magazine hails California for offering the best quality of life in the nation. But, in the eyes of these same executives, California polls as the worst state for business. Meanwhile, Texas ranks as the best.

Winegarden also found some hope in the election of Jerry Brown as governor. He pointed out that, although Brown opposed Proposition 13 in his first go around as governor, after the tax-cut measure passed in 1978, he enthusiastically backed it.

“He could out-Texas Texas if he adopted some version of his 1992 flat-tax idea for California,” Winegarden said. “I would love to see him do that. Get rid of all state taxes except for a flat tax on income. You could get the same revenue, but revitalize the California mystique. Nobody benefits when California is not strong. As in sports, competition makes everybody better.”

John Seiler is a reporter and analyst with CalWatchDog.com. His email: [email protected].