This commentary was originally featured in The Texas Tribune on October 23, 2017.
Some folks never miss an opportunity to discount Texas’ prosperity by ascribing the Lone Star State’s good fortune to its oil and gas deposits. A recent example from The New York Times, “Why Texas No Longer Feels Miraculous,” argues that the oil and gas sector boom led to the “Texas Miracle” even as conservative fiscal policies hurt Texans.
But Texas’ prosperity isn’t a short-term miracle. It’s a sustained growth period supported by an institutional framework known as the “Texas model” — a model that continues to serve the state as it depends less and less on oil and gas.
If the naysayers were correct, the steep decline in oil prices from the summer of 2014 to early 2016 should have led to an economic catastrophe in the state. It didn’t. Though certainly not immune to fluctuations in the oil and gas sector, Texas is much more resilient than it was in the 1980s. Thirty-plus years ago, oil and gas represented roughly one out of every four dollars of production in the state and the sector employed 5 percent of the labor force. Today, it’s only half as important and employs just 1.8 percent of working Texans.
That’s not to say there are fewer employed Texans. The best path to individual prosperity is a job, and Texas has been America’s jobs engine. The state’s unemployment rate has been at or below 5 percent — the rate some economists consider full employment — for 39 straight months, dating back to July 2014 when oil prices started falling. The U.S. average unemployment rate has matched this feat for only 24 consecutive months.
And Texas employers have created 23 percent of all U.S. civilian jobs since December 2007, when the last national recession began, in a state with only 9 percent of the nation’s population. Despite the loss of 7,300 net nonfarm jobs last month from what’s likely a one-month repercussion of Hurricane Harvey in late August, employers have added 256,100 jobs in the past twelve months, for a healthy average of 21,342 jobs per month — all while the price of oil averaged $50, less than half its 2014 peak. This should put the false argument about Texas’ utter dependence on oil and gas activity to rest.
To see the true impact of the Texas model, all you have to do is compare the state with California. Together the two states are home to 1 in 5 Americans and account for 25 percent of the nation’s economic output. Both are majority-minority. And they have diametrically opposed governing practices.
Texas ranks third best in economic freedom based on government spending, taxation and regulation according to the Fraser Institute, while California is eighth worst. Of the more than 150 independent studies on the relationship between state-level economic freedom and various economic outcomes, an overwhelming majority find that states with higher economic freedom have greater prosperity.
Business climate rankings also reflect these policy differences. Texas tops the list by U.S. corporate executives and the Business Facilities Magazine, with the 13th-best business tax climate in the nation according to the Tax Foundation. Meanwhile, California doesn’t make it into the top 10 in either ranking of business climate and has the third worst business tax climate.
There’s certainly room for improvement in Texas — the state should expand education freedom and structurally reform property taxes, for example — but overall the American Dream is alive and well here. Before people write-off the Texas model as some miracle based on oil and gas activity, they should do their homework. If they do, they’ll notice that Texans are flourishing — and that other states and D.C. should follow Texas’ lead.
You may often wonder how Texas’ business tax climate ranks with other states. Well, the Tax Foundation has an answer in their recently released 2018 State Business Tax Climate Index report rankings all fifty states based on the burdens of each state’s corporate income tax, individual income tax, sales tax, unemployment insurance, and property tax. We care about these sort of rankings because lower tax burdens increase economic freedom, which is associated with greater prosperity.
You’ll notice that Figure 1 presents the ranking of each state, whereby the top ranked states include either states without at least one major tax, such as the individual income tax, or states that have all major taxes with low rates and broad bases. Meanwhile, poor ranked states share similar shortcomings such as complex non-neutral taxes and comparatively high tax rates, such as in the three worst ranking states: California, New York, and New Jersey.
Figure 1: Texas’ Business Tax Climate Ranking Unchanged at 13th Best Nationwide
Source: Tax Foundation
How has Texas fared? Texas ranked 13th best nationwide for the second year in a row. While Texas continues to excel in the individual income tax category—because it rightfully doesn’t have one, its tepid overall ranking can be attributed to lower scores in property tax, corporate income tax, and, particularly, unemployment insurance, where it fell thirteen spots since last year.
Although the 2015 Texas Legislature cut the business franchise (margins) tax rates by 25 percent, the relative ranking of the corporate income tax portion of the index remains unchanged at 49th, or second worst! This is because the business tax is a gross receipts-style tax that is costly to comply with and pay. If Texas eliminated this onerous tax, the Tax Foundation finds the state’s overall business tax climate could increase to 3rd best and the Texas Public Policy Foundation and the Legislative Budget Board (LBB) estimated large economic gains.
Texans have been hurt by burdensome local property taxes for too long, with that ranking in the report being 14th worst in the last two years. We know all too well about complexity, high rates, and lack of voter oversight. To overcome this burden, the Texas Public Policy Foundation recommends structural reforms in the short run while replacing them soon with a reformed sales tax (higher rate and broader base) to achieve more economic growth and job creation.
Moving forward, our elected officials should consider these rankings by the Tax Foundation and other reports when looking for ways to improve the state’s business tax climate so Texans have the best chance to start a new business or gain employment. The Texas model of limited government has contributed to human flourishing, where 25 percent of new jobs created nationwide have been since December 2007, but there’s always room for improvement.
This commentary originally appeared in The Houston Chronicle on October 15, 2017 and updated on January 18, 2018.
Criticism of the North American Free Trade Agreement is nothing new. In 1992, U.S. presidential candidate Ross Perot notoriously implied that if NAFTA passed there would be a “giant sucking sound” as jobs and wealth left the country. Recently, there’s discussion of adding sunset clauses and other measures that could weaken the agreement because of similar fears.
Examining free trade agreements before and after inception is wise. But, 23 years after inception of NAFTA, critics must consider the vast data noting the benefits to Americans, especially for those in Texas. Instead of trashing the agreement, renegotiation should include encouraging freer trade.
While today some applaud changes to NAFTA, a recent Gallup poll shows that 72 percent of Americans believe foreign trade increases economic opportunity. This support across the political spectrum is on the rise since 2011, with 80 percent of Democrats, 71 percent of independents, and 66 percent of Republicans now favoring foreign trade.
Often headlining the free trade debate is the notion that one country is pitted against another. But Gallup’s data suggest the economic benefits are widely understood wherein individuals voluntarily trading with one another mutually prosper.
In other words, America doesn’t trade with Mexico, Americans trade with Mexicans and both see benefit from it.
As voluntary exchange within a legal framework benefits people in U.S. states, an optimal free foreign trade agreement would allow movement of goods among countries while respecting each countries’ laws. Unfortunately, politics picks winners and losers, evidenced by NAFTA’s 1,700 pages of carve outs for privileged sectors.
Regardless, evidence indicates Americans benefit from NAFTA, particularly in states like Texas.
In 2016, Texas exports totaled $231.1 billion and imports were $229.3 billion, for a foreign trade surplus of $1.8 billion. Instead of thinking about trade deficits as bad and trade surpluses as good, consider that people benefit by a remarkable total of more than $460 billion through trade.
Texas’ trade with Mexico is almost 40 percent of total exports and 35 percent of imports, resulting in a $10.8 billion trade surplus. Exports to Canada are 8.6 percent of total exports and 6.6 percent of imports, for a $4.7 billion trade surplus.
While NAFTA partially contributes to a $15.5 billion trade surplus in a $1.4 trillion economy, Texans prosper from each individual transaction through overall lower prices and a growing economic pie. Research finds that fewer trade impediments among NAFTA countries helped Texas become economically diversified and more resilient to oil price shocks over time.
In the early 1980s, Texas’ mining industry, comprised mostly of oil and natural gas activity, was 21 percent of the state’s private economy. While the oil price collapse in 1986 reshaped Texas’ economy, there was a steady decline in mining’s share after the passage of NAFTA. Mining is now only 8 percent of Texas’ private economy as expansions in sectors like healthcare, technology, and retail outpaced that of oil and gas activity.
Result: More Texans have prospered from trade with Canadians and Mexicans. However, foreign trade alone is not wholly responsible for this growth. Pro-growth policies in Texas have also provided the institutional framework for Texans to thrive.
The Fraser Institute’s measures of economic freedom, which compares entities based on government spending, taxes, and regulation, ranks Texas as the third best nationwide, while the U.S. now ranks a multi-decade low of 16th worldwide.
Policy makers would be wise to consider the evidence of increased economic prosperity from foreign trade agreements despite their imperfections and focus on reducing government’s influence on Americans.
Rolling back needless regulations, cutting individual income taxes and the developed world’s highest corporate income tax rate, and slashing excessive government spending would support greater economic growth.
Meanwhile, reductions of existing trade barriers and expansion of foreign trade should be a priority.
We must also be honest that free trade doesn’t necessarily create a net number of new jobs and often the economic benefits are diffuse while the tradeoffs can be acute. Ultimately, though, free trade benefits everyone by lowering the general price level, opening up previously inaccessible markets, and creating new industries providing more opportunities for more people to flourish.
Americans trade with the rest of the world for the same reasons that they trade with each other. They trade because it allows them to satisfy their desires while focusing their efforts on what they do best, which in turn raises productivity, incomes, and standards of living.
A free enterprise system with government institutions preserving liberty best supports individual prosperity, even between countries.
Vance Ginn, Ph.D., is director of the Center for Economic Prosperity and senior economist and Dayal Rajagopalan is a research associate at the Texas Public Policy Foundation, a nonprofit, free-market research institute based in Austin. They may be reached at email@example.com.
Ph.D. Economist at the Texas Public Policy Foundation. Blog posts are publications by the author.