Four unique reasons why Texas’s economy will continue to grow
Texas has cowboy boots, California has flip flops, they’re a red state and we’re a blue state, they have cows and we
have longhorns. Yet now this rivalry seems to be accelerating, as both states struggle under budget issues and compete
to attract businesses which will in turn create jobs.
As we discussed last week, Texas and California are natural rivals due to their size, rankings of GDP, and differences in
fundamental culture and political philosophy. They are number one and two in states in contributing to the national GDP.
Texas appears to be winning with an unemployment rate of just 6.9%, compared to the US rate of 8.1% and California’s
at 10.9%. California’s unemployment rate, at 10.9 %, is higher than every other state except Nevada and Rhode Island.
With 12% of America’s population, California has one-third of the nation’s welfare recipients. Each year, the evidence
that businesses are leaving California due to excessive state taxes and stringent regulations grows. According to Spectrum
Location Solutions, 254 California companies moved some or all of their work and jobs out of state by the end 2011, an
increase of 26 percent over the previous year and five times as many as in 2009.
Texas seems to be making the right decisions to attract business – California not so much.
If we look at the top metropolitan areas in the US for job creation, Texas leads with six cities, Austin taking the top spot
followed by Houston, San Antonio, Fort Worth and Dallas in the top six. Only Los Angeles was in the same top ten list
compiled by the U.S. Bureau of Labor Statistics (Metropolitan Employment and Unemployment Summary monthly
based on data from the Current Employment Statistics Program, which surveys businesses and government agencies
with workers on nonfarm payrolls).
It’s not surprising, then, that an intense debate rages over which model is more satisfactory and sustainable. What is
surprising is the growing evidence that the low-benefit, low-tax alternative succeeds not only on its own terms but also
according to the criteria used by defenders of high benefits and high taxes. Whatever claims are made for imposing high
taxes to provide generous government benefits, the practical reality is that these public goods are, increasingly, neither
public nor good: their beneficiaries are mostly the service providers themselves, and their quality is poor. For evidence,
look to the two largest states in the nation, which are fine representatives of the liberal and conservative alternatives.
One out of every five Americans is either a Californian or a Texan. California became the nation’s most populous state
in 1962; Texas climbed into second place in 1994. Before 1990, both states grew much faster than the rest of the country.
Since then, only Texas has continued to do so. While its share of the nation’s population has steadily increased, from
6.8 percent in 1990 to 7.9 percent in 2007, California’s has barely budged, from 12 percent to 12.1 percent. Both have
maintained their spots since. They have many similarities: populous warm weather states with large metropolitan areas,
diverse strong economies, and borders with Mexico producing comparable demographic mixes. Both are “majorityminority” states, where non-Hispanic whites make up just under half of the population and Latinos just over a third.
As we have discussed before, California has the third highest tax burden in the country to Texas’s 42nd. According to
the most recent data available from the Census Bureau, for the fiscal year ending in 2006, Americans paid an average
of $4,001 per person in state and local taxes. But Californians paid a little more at $4,517 per person, well above the
national average, while Texans paid $3,235.
Analyzing the numbers is even more revealing—and, for California, possibly pointing to a change. The biggest contrast
between the two states shows up in “net internal migration,” the demographer’s term for the difference between the
number of Americans who move into a state from another and the number who move out. Between April 1, 2000, and
June 30, 2007, an average of 3,247 more Americans moved out of California than into it every week, according to
the Census Bureau. Over the same period, Texas saw a net gain of 1,544 people per week. Aside from Louisiana and
Mississippi, which lost population to other states because of Hurricane Katrina, California is the only Sun Belt state that
had negative net internal migration after 2000. All the other states that lost population to internal migration were Rust
Belt basket cases, including New York, Illinois, New Jersey, Michigan, and Ohio. In full disclosure and looking from a
neutral view, The Tax Foundation found in a recent two-year period that 406,883 Californians migrated to other states,
while 365,673 people LEFT, for a net out-migration from California of 41,210.
This outmigration has to do with taxes. Besides Mississippi, every one of the seventeen states with the lowest state and
local tax levels had positive net internal migration from 2000 to 2007. Except for Wyoming, Maine, and Delaware,
every one of the seventeen highest-tax states had negative net internal migration over the same period. Conservative
researchers’ technical explanation for this phenomenon is: “Well, duh.” Or, as Arthur Laffer and Stephen Moore wrote
in their paper Competitive States 2010 Texas vs. California: “People, investment capital and businesses are mobile: They
can leave tax-unfriendly states and move to tax-friendly states.”
Summarizing the findings of a report they wrote for the American Legislative Exchange Council, Laffer and Moore
pointed out that between 1998 and 2007, the states without an individual income tax created 89 percent more jobs and
had 32 percent faster personal income growth than the states with the highest individual income-tax rates. California’s
tax and regulatory policies, the report predicts, “will continue to sap its economic vitality,” while Texas’s “pro-growth”
policies will help it “maintain its superior economic performance well into the future.” The clear implication is that
California should become more like Texas.
There are other explanations for Texas’s growth beyond taxation. Research papers from many sources including the
Federal Reserve of Texas point to four factors that have driven the growth of the state. These four factors are the high
rates of population growth and international immigration, high energy and oil prices, low cost of real estate and housing,
and Texas prime location along the nation’s transportation corridors and gateway into Mexico and Latin America.
Population growth and immigration
The rapid population growth of Texas has been the major driver of the state’s economic growth over the last several
decades. The state has a high level of ‘natural growth’ is due to the high birth rate (second in the nation after Utah),
attributed to a number of demographic and cultural factors.
In the last year, 72% of Texas’s net population growth resulted from international migration and natural birth growth, the
remaining 28% resulted from state to state migration. This growth has caused increased domestic demand for housing
and services, subsequently driving job growth.
Low cost of living and low real estate prices
A second major contributor to Texas’s growth is the cost of living is considerably less than the majority of states.
Housing accounts for roughly 1/3rd of an average households spending nationwide, but is closer to 1/4th of household
spending in Texas. This may not seem like a lot but is a tremendous boost for young families.
Texas has the second biggest land mass of any state in the country, much of which is flat and cheap to develop. This
supply of land keeps prices low and makes it considerably cheaper to start a business or family than other parts of the
country. Texas by far has the most open desirable land among the countries most populous states.
The supply of land helps explain the cheap housing. Between 1960 and 2000, the median price home in Texas was 70
to 80% less than the national median average. Unfortunately it dropped by 2006 to 60% less than the national median
average.
There is some debate as to why housing prices did not soar in Texas as they did in the rest of the country. Whether it
was because Texas was the last state to allow homeowners to borrow against their home equity or the strict controls over
housing lending, or whether it was the plentiful cheap land, there is no doubt that Texas did not face the boom and bust
of housing and real estate that preceded the recession in other states.
In addition to keeping housing prices low, the absence of a housing price bubble benefitted the Texas economy in other
ways. The foreclosure rate soared in other states, but was much lower in Texas. Remember 55% of all foreclosures in the
US happened in thirty-two counties, none of which are in Texas. As a result, Texans on the large scale did not experience
the traumatic loss of equity and savings that other areas did, and avoided the subsequent economic fallout.
Oil and Gas
For much of the 20th century and far into the 21st century, Texas’s economic performance has been and will be driven
largely by changes in energy and oil prices. Since the mid 1980s, the state economy has diversified considerably, but
energy and oil prices still drive this state’s economic engine. Texas remains the nation’s largest producer and refiner of
oil and gas. An added bonus is the discovery and rapid expansion of gas production from shale formations adding to the
state’s economic and job growth.
This production makes up around 10% to 13% of our state’s economy presently, which is a large chunk. However, before
the 80’s oil bust, close to 20% of Texas’s economic growth was oil production. This oil production helped insulate Texas
somewhat from the recession as it did in other mineral rich states such as North Dakota, New Mexico and Montana.
Unemployment has remained under the national average in these states.
Texas: Gateway to Latin America
The fourth major factor contributing to the state’s population and job growth has been Texas’s proximity to Mexico and
Latin America and the major transportation corridors through our state.
As stated above, international immigration has been one of the big drivers of our state’s population growth. In addition
Texas border cities get an economic boost from ‘maquiladoras’, factories in Mexico which work closely with their US
counterparts.
After the passage of the North American Free Trade Agreement in the mid 1990’s, the Texas economy grew significantly
along either side of the border with factories. In addition the treaty has allowed Texas to be the gateway to Mexico and
Latin America with over 40% of all goods shipped to or through our state.
Further, Mexican shoppers have accounted for $3+ billion annually in retail sales according the Dallas Federal Reserve.
While this is a small portion of total retail sales in the state, it accounts for 15% to 50% of retail sales in the border cities.
An amount that is significant to their economic growth and needs.
Texas ports, refineries and transportation corridors to Mexico and Latin America funnel the largest amount of goods and
services through our state. The benefit of this is obvious.
Conclusion
It appears that bureaucracy and regulations are driving businesses out of California. However, it appears that some
businesses are more naturally suited to California, and are growing, while others are more naturally suited to Texas.
Legislators in both states should focus on making it easier for businesses to grow in their respective states.
To explain: Texas has relatively cheap land, cheaper labor and less regulation and lots of open space. California has
expensive land and less space. So businesses that are likely to grow in California are those that don’t need a lot of land
but are high value-added, high intellectual capital labor-intensive production of goods and services.
There’s a long list of sectors in which employment has grown faster in Texas than in California between 2002 and
2011. In terms of manufacturing, Texas outperforms California in automobiles and automotive parts, fabricated metals,
furniture, aerospace, machinery, appliances, nonmetallic fabrication, primary metals and wood products.
California has outperformed Texas in semiconductors, computers and peripherals, communications equipment and
miscellaneous durable goods manufacturing such as medical equipment.
For nondurable goods, employment in Texas grew faster in plastics, rubber, food and petroleum, partly because Texas
has a lot of oil. California outperformed Texas in printing, beverages, tobacco, Kardasians and alcohol - the state has a
lot of vineyards.
It doesn’t appear that start-ups are going disproportionately to Texas. The states each receive the same portion of venture
capital funds as they did before the recession, with Silicon Valley in California taking the lion’s share of venture capital
offerings.
So why is Texas’s unemployment rate so low when California’s is so high? Texas has created jobs in the government,
healthcare, mining and logging (mainly petroleum), education, retail and hospitality sectors. Those aren’t jobs that are
migratory, or that the state “stole” from California. They’re just jobs that are able to be created quickly because Texas’s
business environment doesn’t make it difficult to do so.
California worries about losing jobs to Texas, but it should worry that companies can’t create jobs quickly enough
because of regulations. So far, California’s technology operations haven’t moved away, but their state needs to do more
to ensure they can continue to grow, and create enough jobs to make up for the loss of others.
Today, California businesses can reduce costs by twenty percent in many states and up to 45 percent by moving to other
states including Texas. In today’s uncertain and recessionary times this is a major benefit to the bottom line demanded
by shareholders and the consumer.
Overall tax burden, regulatory environment and overall level of government spending are crucial aspects of each state’s
economic future. In each of these competitive areas, Texas outperforms California. But in this analysts eyes, it is the four
strengths listed above that are not replicable that will help our state grow. That and the ability to focus on the needs of
businesses will continue to be our competitive advantage.
Independence Title
E x p l o r e w w w. I n d e p e n d e n c e T i t l e . c o m
MARK SPRAGUE, State Director of Information Capital
Office: 512/454-4500 – Mobile: 512/563-4764 – Fax: 512/454-4559
The opinions expressed in this publication are solely those of the author and may not necessarily reflect those of Independence Title Company. The
information contained herein was obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made by the
writer, Independence Title Company, or any other person to its accuracy, completeness or correctness.
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