Texas booms while California busts

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Mark Hemingway

First of a five-part series

Among the states, it has become clear there are two competing visions of political economy in America, embodied by California and Texas. One vision involves the economic devastation that comes of an overregulated economy. The other reveals the prosperity unleashed by smaller government.

Broadly speaking, the two states have many similarities. They have diverse economies, large urban areas, a border with Mexico and similar demographic make-up, with Hispanics a third of the population. Yet one state is failing and one state is succeeding.

California is facing budget shortfalls in excess of $20 billion each year for the next five years, and acquires $25 million in new debt each day. “We’ve been living in fantasy land. It is much worse than I thought. I’m shocked,” then California Gov.-elect Jerry Brown, D, told the Los Angeles Times.

By contrast, when Gov. Rick Perry, R-Texas, campaigned successfully for a third term this year, he ran ads touting the fact that his state has billions in surplus. In fact, Texas was one of only six states that did not run a budget deficit in 2009. Perry, with characteristic Texas humility, has taken to taunting California on his Facebook page.
Texas is expected to run a two-year, $15 billion deficit going forward. But this still doesn’t have observers worried. Texas legislators closed a $10 billion deficit in 2003 without raising taxes.

Already the Texas legislature has proposed $73.8 billion over the next two years or “exactly what the state comptroller said Texas will earn in revenues over the next two years,” according to the Associated Press. The Texas legislature operates under the radical assumption that the government can only spend what it earns.

While Texas has been affected by the economic downturn, its 7.9 percent unemployment rate is well below the national average of 9.8. At 12 percent, unemployment in California is well above average.

Perhaps the most dramatic illustration of Texas’ superiority is that Americans have been stating their preference for the Lone Star State with their feet.

Between 2000 and 2009, California had a domestic outflow of 1.5 million people, while Texas had 850,000 move in from other states. From 2008 to 2009, Texas’ population inflow was double that of any other state.

So how have two similar states ended up in such radically different situations? The answer is smaller government.

What Texas is doing “appears as right-wing science fiction to many California legislators and pundits. They claim that serious reform of the tax code is unrealistic, that a large state has many duties to fulfill, and that it is irresponsible to call for a return to a 19th century view of the role of government,” write economists Arthur B. Laffer, Stephen Moore and Jonathan Williams in their annual report “Rich States, Poor States.”

Texas has no state income tax or personal capital gains tax and a small 1 percent gross receipts tax on business. In contrast, California’s 10.3 percent personal income tax is the second highest in the country, and the Golden’s State’s top marginal rates for corporate income and capital gains are 8.84 and 10.55 percent, respectively.

“We hasten to add that the last time we checked, Texas still had literate kids, navigable roads and functioning hospitals, which one would think impossible given the hysterical rhetoric coming from defenders of California’s punitive tax system,” write Laffer, Moore and Williams.

Texas is easily weathering the economic storms, while state services and infrastructure in California are on the verge of collapse. The contrast between the two state economies serves as a warning to the whole country.

Mark Hemingway is an editorial page staff writer for The Examiner. He can be reached at mhemingway@washingtonexaminer.com

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