Competitive institutions, whether they are individual markets or entire economies, have proven historically to advance the most benefit to the greatest number of people. Given the U.S. system of federalism, states decide their own tax, spend, and regulatory policies that best meet the needs of their citizens. In this laboratory of competition, it’s important to evaluate what works best.
A recent study titled A Labor Market Comparison published by the Texas Public Policy Foundation compares economic freedom and labor market measures among the largest states—California, Texas, Florida, and New York—and U.S. averages during the last 15 years.
Texas has the highest ranking of economic freedom according to the Fraser Institute. The Texas model of low taxes, no personal income tax, and sensible regulation have been the catalyst keeping the state within the top three most free states since 2000. It shouldn’t surprise you that California and New York rank in the bottom ten as they have the highest top two marginal income tax rates.
During the 2000 to 2014 period, Texas created 73 percent of all new nonfarm jobs in the U.S., which is remarkable from a state that is less than 10 percent of the nation’s population and economic output. While California had an average annual job creation rate of 0.7 percent and New York’s was 0.5 percent in that period, Texas’ rate was more than double at 1.6 percent.
Though mass layoffs happened nationwide during the Great Recession, Texas’ civilian employment only slowed, and Texas had employed 1.6 million more people compared with 404,694 fewer people employed in the rest of the nation through December 2014.
Despite critics’ claims, these jobs have not all been in the mining industry, which is dominated by oil and gas jobs. This industry did greatly increase hiring by 110 percent during the last 15 years, but the industry’s share of Texas nonfarm employment is less than 3 percent, which is about half the share it was during the 1980s. Educational and health services, leisure and hospitality, and professional and business services are industries that now comprise 37 percent of jobs in a highly diversified economy and all increased by 40 percent or more since 2000.
More jobs led to a lower 15-year average unemployment rate than other large states and the U.S. average. This trend has continued in 2015 as the latest employment report for September showed that Texas’ rate of 4.2 percent has now been at or below the national average for 105 consecutive months.
Some have made claims that these are all low-wage jobs, but to the contrary, they are a healthy mix. Inflation-adjusted annual private pay has increased by 10.2 percent compared with only a 6.1 percent U.S. average since 2001. Further, job growth increased the most in the highest wage quartile and second most in the upper-middle quartile according to the Dallas Federal Reserve.
With all the government assistance and high marginal tax rates in California, you would think that they would have less poverty and less income inequality. According to the Census Bureau’s latest data, Texas’ supplemental poverty rate that accounts for housing costs and noncash government transfers matches the U.S. average at 15.9 percent, while California is the worst at 23.4 percent.
Economist Mark Frank at Sam Houston State University provides measures of income inequality for states that look at the income held by the top 10 percent of income earners. This data shows that Texas’ top income earners have had a lower share than California, New York, and Florida with far fewer redistributionary policies.
Though there is much success in the Texas model that those in D.C. and elsewhere would be wise to follow, Texas must never lose its competitive advantage. State lawmakers should continue to end the onerous business margins tax, effectively limit spending, and eventually abolish property taxes.
Vance Ginn, Ph.D., is an Economist in the Center for Fiscal Policy at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. He may be reached at [email protected].