The best-run states: another view
Fri October 15, 2010 9:49 am

This article is a two-state comparison between Texas and California. It was published yesterday (Thursday) on the Web site Investors.com.

Business Climate:

In Texas, the payroll count is back to pre-recession levels. California is nearly 1.5 million jobs in the hole. Why such a difference? Chalk it up to taxes, regulation and attitude.

The contrast between America's two largest states, in terms of both population and economic heft, is as stark as it has ever been. Texas is leading the country out of the recession; California is holding it back.

By August, the job count in Texas had rebounded to where it was when the recession officially began in December 2007. California's payroll was still 1.46 million below the pre-recession level. The nation as a whole was down by 6.42 million jobs. In other words, California, with one-eighth the nation's population, accounts for more than a fifth of its job deficit left over from the downturn.

What country needs a state like that dragging it down?

Of course, what America really needs is not to be California-free, but to have something like the old California back — the economic dynamo that was the envy of the nation in the '50s and '60s. But to those who try to do business in the state now, those days seem impossibly distant.

California's business climate is notoriously bad. CEOs polled by the magazine Chief Executive have ranked it dead last for the past five years, with Texas, naturally, ranked first. To anyone seeking to start an enterprise and hire workers, moving to Texas is a lot less trouble than trying to change California's high taxes, overregulation and not-so-subtle bias against the profit motive.

A new study from the Texas Public Policy Foundation gives a good overview of why California lags so far behind and what it can learn from its Lone Star rival. The study was prepared by the econometrics firm of supply-side guru Arthur Laffer, so it's no surprise that Texas gets high marks for low taxes and, in particular, its lack of a personal income tax. The data behind these conclusions are hard to discount, no matter what your point of view.

California and other states with steeply progressive income taxes simply do not grow as fast as their tax-free competitors. The nine states with no income tax had nonfarm payroll growth of 11.76% from 1999 to 2009. Payrolls in the nine states with the highest top tax rates (a group that includes California) rose an anemic 2.48%.

The difference in tax systems reflects a difference in attitudes toward business and the wealth that business generates. Capital gains are tax-free in Texas; in California, they are taxed up to 10.55%. To an entrepreneur choosing where to set up shop, the message is clear: Texas wants to reward success; California wants to tax it.

* * * *

California has certainly made a mess of things. For a long time, the Golden State enjoyed a free ride on its fiscal policies, because people were willing to put up with the high taxes and uncontrollable unions because California had the cachet of being the realization of the American dream. That is over.

Unquestionably, the absence of a personal income tax here accounts for a lot of Texas's attractiveness to business. One reason so many Fortune 500 corporations have moved to Texas is that their CEOs and their highest paid executives won't have to pay state income taxes. It's a dead issue here. Texas is not going to have an income tax.

It has become very popular here to compare Texas to California. It is something of a false comparison. It sounds like a comparison of equals, but it isn't. It's sort of like comparing a great team--let's say, the Steelers--to an over-the-hill team like the Cowboys. It really makes the Steelers look good, because the Cowboys still have an aura, and to beat them is regarded as a big deal. But in fact the Cowboys are losers. California is the Cowboys. It sounds like a worthy rival, but it isn't. Texas looks good, but it is whipping up on a cherry-picked overhyped franchise.

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