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March/ April/ May 2014 Oops: The Texas Miracle That Isn’t

Conservatives say the Lone Star state’s recent record of growth validates their economic agenda. That record crumbles upon inspection.

By Phillip Longman

And despite all the gloating by Texas boosters about how the state attracts huge numbers of Americans fleeing California socialism, the numbers don’t bear out this narrative either. In 2012, 62,702 people moved from California to Texas, but 43,005 moved from Texas to California, for a net migration of just 19,697. That’s a population flow amounting to the movement of one village in a continental nation. Far from proving the merits of the so-called Texas model, it shows just how few Californians have seen fit to set out for the Lone Star State, despite California’s high cost of housing and other very real problems. The same is true for all but a handful of Americans living in other states. Net domestic migration to Texas peaked after Hurricane Katrina devastated Louisiana and Mississippi, and has been falling off ever since.

This comparatively low level of net domestic migration to Texas is consistent with another little-appreciated fact that runs counter to the conservative narrative about the Texas Miracle. It is that, for most Americans, as well as for most businesses, moving to Texas would not mean paying less in taxes, and for many it would mean paying more.

Oh yes, I know what you’ve heard. And it’s true, as the state’s boosters like to brag, that Texas does not have an income tax. But Texas has sales and property taxes that make its overall burden of taxation on low-wage families much heavier than the national average, while the state also taxes the middle class at rates as high or higher than in California. For instance, non-elderly Californians with family income in the middle 20 percent of the income distribution pay combined state and local taxes amounting to 8.2 percent of their income, according to the Institute on Taxation and Economic Policy; by contrast, their counterparts in Texas pay 8.6 percent.

And unlike in California, middle-class families in Texas don’t get the advantage of having rich people share equally in the cost of providing government services. The top 1 percent in Texas have an effective tax rate of just 3.2 percent. That’s roughly two-fifths the rate that’s borne by the middle class, and just a quarter the rate paid by all those low-wage “takers” at the bottom 20 percent of the family income distribution. This Robin-Hood-in-reverse system gives Texas the fifth-most-regressive tax structure in the nation.

Middle- and lower-income Texans in effect make up for the taxes the rich don’t pay in Texas by making do with fewer government services, such as by accepting a K-12 public school system that ranks behind forty-one other states, including Alabama, in spending per student.

Moving a business to Texas also turns out to have tax consequences that are inconsistent with the conservative narrative of the Texas Miracle. Yes, some businesses manage to strike lucrative tax breaks in Texas. As part of an industrial policy that dares not speak its name, the state government, for example, maintains the Texas Enterprise Fund (known to some as a slush fund and to others as a “deal-closing” fund), which the governor uses to lure favored businesses with special subsidies and incentives.

But most Texas businesses, especially small ones, don’t get such treatment. Instead, they face total effective tax rates that are, by bottom-line measures, greater than those in even the People’s Republic of California. For example, according to a joint study by the accounting firm Ernst & Young and the Council on State Taxation, in fiscal year 2012 state and local business taxes in California came to 4.5 percent of private-sector gross state product. This compares with a 4.8 percent average for all fifty states—and a rate of 5.2 percent in Texas. With the exception of New York, every major state in the country, including New Jersey, Massachusetts, Pennsylvania, Ohio, Michigan, Indiana, Illinois, Wisconsin, and Minnesota, has a lower total effective business tax rate than Texas. If you think that means Texas might not offer as much “liberty” as advertised, well, you’re right.

The same study compares how much businesses in different states pay in taxes for every dollar they get back in government-provided benefits. Using methodology developed by the Federal Reserve Bank of Chicago, the study first allocates public spending between households and businesses. Certain expenditures, such as for health care and welfare, are treated as benefiting only households; others, such as for police, fire, and highway transportation, are treated as benefiting businesses as well. The big question mark here is how to treat education spending, since businesses differ in how much education they require from their workers. But regardless of how that allocation is made, California businesses as a whole still get a far better deal on their taxes than those in Texas.

For example, under the assumption that spending on education benefits only households and not businesses, California businesses pay $2.30 in taxes for every dollar they get in benefits, while Texas businesses pay $5. By this measure, Texas is the ninth-worst state in the country in the cost/benefit ratio it offers businesses on their taxes. Assuming that 50 percent of education spending benefits business, California businesses pay $1 in taxes for every dollar they get in benefits, while Texas business pay $1.50. Either way, it’s no wonder that Texas’s economic development efforts rely so heavily on (largely false) advertising.

The business case for Texas does not speak for itself. It may be a great place to be a big oil or petrochemical company, or a politically favored large corporation able to wring out tax concessions. Its state laws are also hostile to unions, and its wage levels are generally lower than in much of the rest of the country. But for the vast majority of businesses, which are small and not politically connected, Texas doesn’t offer any tax advantages and is in many ways a harder place to do business. This is consistent with Census Bureau data showing that a smaller share of people in Texas own their own business than in all but four other states.

Before the 1980s, Texas followed a long, populist tradition that tried to protect family farmers and other small-scale businesses and consumers. Under its 1876 constitution, for example, Texas enacted consumer protections against predatory mortgage lending, with provisions that ironically helped to hold down foreclosures in Texas during the Great Recession. In 1889, Texas became the second state in the country to enact an antitrust law. Two years later, it further pioneered government regulation of big business by establishing the Texas Railroad Commission, which went on to protect wildcatters and other small-scale oil producers by regulating the oil industry in ways that kept outside Goliaths like Standard Oil at bay. But since the 1980s, “pro business” in Texas has more and more come to mean just pro Big Business.

Phillip Longman is senior editor of the Washington Monthly.

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