The Texas Model vs. California – Which works Better?

California vs Texas

California vs Texas

(This article is an excerpt from the book The 5-Minute Economist)
In many ways, California and Texas are quite alike. They are two of the largest states in the US by population and by sheer size. They both have large immigrant populations, long coastlines, a border with Mexico, and abundant energy reserves.
Politically, though, they represent opposite sides of the spectrum. California, famously liberal; Texas, fiercely conservative. Consequently, they have quite dissimilar public policies. California ranks in the top five states for highest state and local taxes, while Texas ranks in the bottom five. While Texas encourages energy extraction, California actively legislates against it (despite having the largest shale oil reserve in the nation). Hand in hand with this, the West Coast state has some of the most onerous business regulations in the nation, while the Midwestern state is decidedly business-friendly.
In fact, during 2013, these radio ads played throughout California: “Building a business is tough, but I hear building a business in California is next-to-impossible. This is Texas Governor Rick Perry, and I have a message for California businesses: come check out Texas.”
As such, the states employ different strategies of taxation, as the chart below shows.

Tax split in Texas and California

Tax split (collection) in Texas and California (out of 10% total, 2013)

California does indeed have far higher corporate and individual income taxes than its cowboy counterpart, but that doesn’t mean Texas taxes less. It actually has higher sales and property taxes as well as selective taxes (e.g. cigarettes, gasoline, liquor) than its coastal cousin.
But do the two radically different approaches produce radically different results? Let’s see.

What is economic performance indexOn the chart below, the EPI scores for both states somewhat track each other. Some years, Texas is ahead, while others, California. When we calculate the average EPI score from 1980 to 2015, the final tally stands with California at 88.0% and Texas only marginally better at 89.7%—both solid B grades.

Economic performance of California and Texas

Economic performance of California and Texas, 1990 – 2015

Furthermore, we have to take into account each state’s disproportionate economic impact. Texas is among the top oil-producing states in the nation. The rising prices of oil and natural gas have driven a large part of the Lone Star State’s growth in the past decade. With the recent decline of energy prices, though, the state’s EPI is decreasing, too.
California was hit harder by the burst of the housing bubble than Texas in 2009. Although Texas property taxes are higher, its real estate and rental-and-leasing sectors make up only about 8% of its Gross State Product (GSP). California, on the other hand, derives about 16% of its GSP from those same sectors. Inevitably, the housing crash hurt the West Coast state harder than it did Texas.
Both states have diversified their industries, though. California’s income taxes have risen, thanks to the economic recovery and the state’s high personal income taxes in the past few years. Texas has made a concerted effort to diversify in healthcare and technology, so the recent downturn in oil prices hasn’t affected it as badly as a similar downturn in 1986 (when its EPI dropped from 90% to 81.5% in just two years).
So, despite quite different public policies and methods of taxation, both states perform admirably well—really, no better nor worse than the other.

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