In the first five months of 2018, the rate of nonfarm private sector job growth in the ten most-populous low-tax state doubled that of their five high-tax counterparts. This is a strong departure from the job growth seen in 2016 and 2017 where there was no appreciable difference in the rate of employment growth among the 15 most-populous states.
Hundreds of millions of Americans make decisions about how to use their money every day. Employers and investors—from people running small businesses to the big Wall Street financial firms—do this as well, though they spend more effort to decide how to invest their capital than the rest of us do to decide what we’re going to eat for lunch.
Advocates for larger government, higher taxes and more red tape maintain that these have little to no negative effect on the economy. Reality, in the form of economic data collected and reported by the federal government, indicates otherwise.
On the economic policy front, President Donald Trump has won two significant victories: the ongoing effort to pare back burdensome federal regulations and the massive federal tax cut and reform passed into law in late December of last year.
A key part of the federal tax overhaul was the limitation of the state and local tax deduction to $10,000 per household for those taxpayers who itemize their deductions. This had the effect of significantly reducing the federal tax subsidy for high-tax states. The bottom line for many high-end taxpayers is that they may see little to no tax relief if they live in California or New York while their counterparts in Texas or Florida may see a far larger tax cut.
Over the long term, the change to the federal tax code—if extended—should result at least two things at the state level: increased incentive for lawmakers from high-tax states to look for ways to reduce taxes; and a greater incentive for job-creating investment to flow from high-tax states to low-tax states. Now, in the first five months of 2018, evidence appears to be building up for the latter.
The ten most-populous low-tax states as determined by federal SALT deductions are: Arizona, Florida, Georgia, Michigan, North Carolina, Ohio, Pennsylvania, Texas, Virginia and Washington. Collectively, these states have seen a remarkable 1.24 percent seasonally adjusted nonfarm private sector job growth rate through May 2018. This compares to the national rate of 0.83 percent. Significantly, the rate of job growth in the low-tax states is now double that of the high-tax states: California, New York, Illinois, New Jersey and Massachusetts, 0.63 percent.
The low-tax state private sector job growth rate leader for the first five months is Texas, clocking in at 1.78 percent or 185,500 jobs added this year alone. Lest critics think this is only due to the resurgent oil and gas industry—a more capital-intensive than labor-intensive sector of the economy—the number two and three job leaders were Virginia at 1.60 percent and Arizona at 1.59 percent.
Of the additional 185,500 private sector jobs in Texas in 2018, only 21,000 came from the mining and logging sector of which oil and gas is the major portion. In contrast, California added 100 jobs to the mining and logging sector. It’s important to note here that California has the nation’s fourth-largest oil and gas reserves—it’s just that state policy is to make it very difficult to take it out of the ground and use it.
For the high-tax states, Illinois serves as the cautionary example of what an out-of-control state government does for job growth with the state only seeing a 0.39 percent increase in private sector employment in 2018.
California’s job growth rate was 0.67 percent, meaning Texas’ private sector payrolls grew 164 percent faster than those in the Golden State.
The federal tax cut became law on December 22, 2017 with Pres. Trump’s signature. We now have five months of national and state employment data since then. The evidence suggests that money is flowing to low-tax states, creating more jobs in the process. And, while taxes and regulations are only two parts of a larger economic picture that includes labor costs, trade, energy and land costs, to name a few factors, they do play an outsize role in decision making.
So far, it looks like the Trump tax cuts have been good for America and very good for those states with policies that are welcoming of job growth.
This commentary was originally featured in Forbes on June 15, 2018.