Lower taxes and more freedom is a winning combination in Texas, and it will work for the rest of the country, too.
Congress is finally taking note of the burgeoning prosperity in economically free states like Texas, which has far outpaced economic gains seen in less-free states, such as California. And D.C. is belatedly abandoning counterproductive policies that led to the slowest U.S. economic recovery since World War II.
These recent D.C. policies include massive tax cuts and the repeal of 67 regulations — with only three new ones enacted during President Trump’s first year. If America is to regain its vibrant economy so people flourish, more policies like these — straight out of the Texas model playbook — will be necessary.
The Fraser Institute’s new Economic Freedom of North America (EFNA) report provides valuable insight into which states have policies that make them economically free.
States with relatively less government spending, lower taxes, and more labor market freedom — three major categories in the EFNA — allow entrepreneurs to take risks, with benefits for everyone. Study after study (and more than 230 scholarly articles ) find that freer states have higher standards of living.
The Fraser Institute report serves as a valuable guide when states design policy. Consider the polar opposite approaches of Texas and California to state policy. As the two most populous and richest states, each has taken a different policy path — with starkly different results.
According to the EFNA, California again ranked the second-least economically free state, ahead of only New York.
California’s government spending posts its lowest score on record on its ballooning state budget and massive unfunded pension liabilities. Taxes score a nearly record low because of the highest top marginal income tax rate and other burdensome taxes. Labor market freedom ranks in the bottom half of states with excessive regulations and a high minimum wage.
Texas’ economic freedom improved one ranking to second best with its overall score setting the state’s record high.
Texas received a good score for government spending, with the Texas Legislature’s passage of two straight conservative budgets. On taxes, the state scored its highest since at least 1995, as Texas has no personal income tax but has onerous business and property taxes (the Foundation advocates eliminating both). Labor market freedom set a record and leads the nation because of its right-to-work status and a federally matched minimum wage.
These scores and rankings do not mean much on their own. Examining how lives are affected, the prosperity gains in Texas far exceed those in California.
After the last major federal tax reform in 1986 —and Texas’ conversion over time to fiscally conservative policies — Texas’ real private economy quadrupled from 1987 to 2016, for a compounded annual growth rate of 4.9 percent.
Meanwhile, California continued its big-government ways, and the Golden State’s economy grew less than the Lone Star State. California’s real private output tripled, giving a compounded annual growth rate of only 3.8 percent.
While the 1.1 percentage point difference may not seem like much, it amounts to Californians being roughly $800 billion poorer partially from not practicing economically free policies.
In addition, the U.S. Bureau of Labor Statistics’ state-level jobs report for November 2017 shows that Texas employers have created the most net nonfarm jobs in the last 12 months of any state. The remarkable streak of positive net nonfarm job creation is now at 81 of the last 86 months.
Even as new population estimates by the U.S. Census Bureau show that growth in Texas was more than double that in California last year, Texas jobs have kept pace and managed to set its record-low unemployment rate of 3.8 percent. California’s rate is at 4.6 percent, partially driven lower by workers leaving the state.
Texas continues to practice freedom-enhancing policies and achieve superior results. The latest efforts by the Trump administration to cut frivolous regulations and excessive tax burdens are pages straight out of the Texas playbook. Now Congress must get past the goal by following the latest addition to the Texas playbook of restraining spending growth to let Americans be free to flourish more in 2018 and beyond.