The current Forbes list of "The Best Cities for Jobs" measures job growth between January 2010 and January 2011. The results provide a blueprint for how and how not to create jobs and are instructive for the state legislature currently considering the state budget. The results are also instructive for counties and cities contemplating more spending, sales and property tax increases, and more restrictive land use controls.
As you might imagine, the big winners are cities in Texas, and the big losers are in California. Of the 397 large, medium, and small areas measured, no California city ranked above 150 in job growth, and California Governor Jerry Brown’s former city of Oakland ranked dead last, even behind Detroit.
As Joel Kotkin and Michael Shires report in Forbes:
But no place displayed more vibrancy than Texas. The Lone Star State dominated the three size categories, with the No. 1 mid-sized city, El Paso (No. 3 overall, up 22 places from last year) and No.1 large metropolitan area Austin (No. 6 overall), joining Killeen-Temple-Fort Hood (the No. 1 small city) atop their respective lists.
Texas also produced three other of the top 10 smallest regions, including energy-dominated No. 4 Midland, which gained 41 places overall, and No. 10 Odessa, whose economy jumped a remarkable 57 places. It also added two other mid-size cities to its belt: No. 2 Corpus Christi and No. 4 McAllen-Edinburgh-Mission.
Whatever they are drinking in Texas, other states may want to imbibe. California–which boasted zero regions in the top 150–is a prime example. Indeed, a group of California officials, led by Lt. Gov. Gavin Newsom, recently trekked to the Lone Star State to learn possible lessons about what drives job creation. Gov. Jerry Brown and others in California’s hierarchy may not be ready to listen, despite the fact that the city Brown formerly ran, Oakland, ranked absolute last, No. 65, among the big metros in our survey, two places behind perennial also-ran No. 63 Detroit-Livonia-Dearborn, Mich.
Why is Texas beating California so badly? The Texas Public Policy Foundation (TPPF) recently published Competitive States 2010: TEXAS vs. CALIFORNIA: Economic Growth Prospects for the 21st Century, co-authored by Art Laffer of the famous Laffer Curve, which sparked the supply-side economics revolution of the early 1980s.
A review of the economic competition between Texas and California provides broader lessons that Texas [and other states] could apply to create an economic advantage compared to any and all of these competitors. The following summarizes the key policies that make Texas a more formidable economic competitor than California:
- Texas imposes a lower, flatter tax burden;
- The government spending burden in Texas is more reasonable; and
- The regulatory environment in Texas is more reasonable and less burdensome.
Specifically, the corporate income tax rates are a tax on capital, and high rates are detrimental of investment, employment, and economic growth. As the TPPF report notes:
Investments are made in order to optimize the after-tax return on the money invested. Businesses and other investors will purchase capital only if the expected return to the capital exceeds the costs–including all taxes on that capital investment. Lower returns on investment due to higher taxes reduce the incentive to invest, and smaller investments yield a less productive capital stock. A lower productive capital stock has a detrimental effect on income, employment, and economic growth in states with higher taxes on capital.
California has one of the top marginal corporate income taxes in the country at 8.84 percent, while Texas has no corporate income tax but does have a one-percent Gross Receipts Tax (GRT). The GRT can be converted to the equivalent of a 5.7 percent corporate income tax rate. North Carolina has a rate of 6.9 percent.
Both JLF President John Hood and VP for Research Roy Cordato have recently commented on Governor Purdue’s recommendation to reduce North Carolina’s Corporate income tax from 6.9 to 4.9 percent.
If passed, the governor’s recommendation would put N.C.’s rate below that of Texas, but Cordato explains that the corporate income tax is actually a myth and should be eliminated entirely because it is a hidden tax on shareholders, workers, suppliers, and customers. Thus it is an unjust tax.
The corporate income tax is based on the myth that corporations actually pay taxes. In fact, corporations not only do not pay taxes, they cannot pay taxes. A corporation is a legal and accounting entity. As is often pointed out, corporations can’t pay taxes, only people can. All taxes "paid" by a corporation must come out of a real person’s pocket.
The people who pay corporate income taxes are:
- shareholders, often employees participating in retirement plans, who pay through reduced dividends and capital gains;
- corporate employees, who pay in the form of lower wages;
- industry suppliers and their employees, who pay in the form of reduced demand for their products and, therefore, lower wages for their workers;
- and corporate customers, who pay in the form of higher prices.
Those who argue that corporations are "not paying their fair share of taxes" are really saying that it is shareholders, workers, and consumers who are undertaxed.
The regulatory and land use environment also makes a big difference. According to the TPPF report:
California’s more complex (and time consuming) permitting processes and more restrictive zoning ordinances create high regulatory costs that deter businesses from starting in California. The California Chamber of Commerce may have summed-up California’s regulatory environment the best when it said: "Taken together, the rules, regulations, and red tape coming out of the state capitol are sending a message to business: Keep away!" Texas’ costs are considerably lower and thus afford a more attractive business environment. Texas’ lower-cost, less-burdensome regulations, in combination with its low-tax burden and historical spending discipline, create an environment conducive to business growth. It also allows Texas to benefit from opportunities when they arise–such as the benefits gained from a healthy oil industry.
Finally, our review has shown that while Texas’ current land use and environmental regulations do less harm than California’s, changes can still be made to improve Texas’ economic performance.
North Carolina’s state and local government officials should recognize the examples provided by Texas and California. All too often, our state and local leaders knowingly or unknowingly are following the California example: more spending, higher taxes, more burdensome regulations, and more restrictive land use controls.
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