News reports indicate that Texas is negotiating a deal with Amazon.com that would defer the collection of the sales tax on Amazon’s sales to Texas residents for 4.5 years in return for Amazon’s promise to invest $300 million in capital and create 5,000 new jobs in the state over the next three years.
While the Texas Public Policy Foundation was critical of recent legislation that would have taxed Amazon’s sales to Texas residents (see here, here, and here), we do not think that deferring the tax for 4.5 years is a good idea. We believe the best deal for Texas-and for Texans-is to not impose the tax at all.
There are two schools of thought when it comes to economic development. One-let’s call it the traditional school-is focused on subsidizing businesses using taxpayers’ money. This approach relies fundamentally on grants, loans, tax abatements, economic development sales tax funds, and the like to lure business into coming or staying in a particular location. Benefits are directed to politically favored businesses that offset the tax and regulatory disadvantages of locating there under normal circumstances.
The other approach-let’s call it the free-market school-seeks to bring and keep businesses in a state by providing the best economic climate for people to live, work, and do business. It keeps taxes low, keeps regulations at a minimum, and generally tries to keep government out of people’s lives-unless it belongs there. One might also call this the Texas model.
While Texas has established programs to compete with the states still playing the traditional “suitcases of cash” game, the Lone Star State has built its foundation on the free-market approach and the facts show that the Texas model is the hands down winner. Since June 2009, when the recession ended, Texas has added 265,300 net jobs, accounting for 45% of net U.S. job creation. Over the last 10 years, the numbers are even better. Texas created more jobs than all other states combined while blowing away it biggest competitors. While Texas created more than 1 million jobs during this period, California, New York, Florida and Illinois combined for 930,000 jobs lost.
How did Texas accomplish this? Well, it wasn’t through traditional economic development programs. According to the Commonwealth Foundation, Texas ranks 37th in the nation in per capita spending on economic development. A more likely explanation is that Texas ranks 50th among the states in state tax burden, compared to California at 9, New York at 11, Florida at 36, and Illinois at 25.
Low-tax states have remarkable advantages over high-tax states in employment growth, income growth, and gross domestic product growth. These stats help us understand why low-tax states also have a strong advantage in net domestic in-migration as a percent of population; people come to Texas because there are jobs here for them that they can’t find in their home states. This helps explain why Texas and New York have almost identical unemployment rates: folks who couldn’t find jobs in New York have moved to Texas to work and grow our economy. Texas is keeping the entire nation employed.
A state that keeps its taxes low and overregulation at bay is one that fosters economic development. On the other hand, a state that plows its cash into economic development programs and government spending is one whose businesses and citizens will soon be leaving for greener pastures.
Texas shouldn’t cut a deal with Amazon. It shouldn’t collect the tax at all. More jobs and investment will come to Texas without the tax than through the deal. And Texans won’t be burdened in paying increased taxes in four-and-a-half-years. After all, a tax increase is a tax increase, no matter how it is put off.
Bill Peacock is vice president of research and planning and director of the Center for Economic Freedom at the Texas Public Policy Foundation.