This commentary was originally featured in The Hill on September 22, 2017.
Though not perfect, NAFTA has increased prosperity and improved the lives of millions of
Americans through greater competition, affordable products, and wealth and job creation. Potential renegotiations of NAFTA could deter these gains if the deal doesn’t include reducing both trade barriers and government favoritism for certain industries.
Consider that Mexico has long maintained state control of natural resources, including natural gas, coal, and oil, resulting in only one petroleum company — the 75-year-old state-run Pemex. As with most government-created monopolies, Pemex has been plagued by corruption and inefficiency, ultimately forfeiting its incentive to take risk and prospect for sub-surface resources.
These developments led to a surprisingly beneficial move in 2013 by Mexican President Enrique Peña Nieto to gradually privatize the energy sector. While initially unpopular, the constitutional changes were in place a year later, opening the gates for foreign investment in Mexico’s energy sector.
Steve Hanson, the CEO of International Frontier Resources Corp., stated, “In short, it is the largest energy opportunity in the world today — and the door has just been opened.” His optimism is largely due to the unprecedented amounts of Mexico’s untouched natural resources.
Texas energy companies are poised to capitalize on this new open market, especially because Texas is the leader of the North American energy industry. When this industry grows, Texas, and America, prosper. With only nine percent of the U.S. population, Texas created 25 percent of all new American jobs since the last U.S. recession began in December 2007, which is around the time the shale revolution began.
Thanks to NAFTA, proximity and profit motives, Texas refineries are intertwined with Mexico’s energy sector. Increased production of Mexico’s crude oil and natural gas often results in more business for Texas refineries, contributing to greater wealth and job creation here at home.
However, there’s no guarantee these economic benefits will continue.
An outright exit from NAFTA might nullify these opportunities and economic gains. In addition, there are regulatory barriers that bar full realization of energy business with Mexico, the majority of which were erected in the wake of the denationalization process.
An amendment to the energy chapter of NAFTA currently allows for these regulatory barriers by granting Mexico unilateral regulatory power in the energy sector. While this specific concession is not typical for free trade agreements, favoritism far too often plagues international trade and should be eliminated.
The Trump administration’s pressure on NAFTA has recently picked up momentum is in accordance with a wider shift from free trade to so-called fair trade with stated goals of shrinking U.S. trade deficits and preventing job losses.
While these goals sound good in theory, U.S. exports and imports contribute to a growing economic pie and job creation with mixed effects on specific industries.
For example, the U.S. International Trade Administration notes that 11.5 million jobs were supported by U.S. exports in 2015, with 10 percent of those in the Lone Star State. Unfortunately, these data account for only part of the job creation supported by foreign trade.
While imports get a bad rap, individuals voluntarily trading in those exchanges benefit or they wouldn’t agree to the transaction. Imports often result in lower prices, higher productivity, and more business investment such that people have more money in their pocket, higher wages, and more job opportunities.
In short, the focus shouldn’t be on reducing trade deficits and risk increased poverty, but rather how to make the U.S. more economically competitive.
Renegotiating NAFTA could serve as a valuable opportunity to promote prosperity, but only by reducing trade barriers and government privilege so individuals in different countries can mutually benefit. In addition, the U.S. can help keep businesses from fleeing and support more job creation at home by cutting excessive government spending, passing pro-growth tax reform, and rolling back onerous regulations.
This is a proven path to human flourishing.
This commentary was published in The Dallas Morning News on September 15, 2017.
This commentary was originally featured in the Fort Worth Star-Telegram on September 6, 2017.
The 85th Texas Legislature’s special session ended Aug. 16. While there were several topics in Gov. Greg Abbott’s call that improved economic freedom and opportunity, which are the basis of greater prosperity for Texans, there was much left desired to strengthen the Texas model.
Texans already enjoy more freedom than most other states. For example, Texas ranks third-highest in the 2016 Economic Freedom of North America (EFNA) report, which ranks states on their relative levels of economic freedom. There have been more than 150 independent studies of the relationship between economic freedom at the state level and a variety of economic outcomes. The overwhelming majority of those have found that states with higher economic freedom have better results, including faster economic growth and higher incomes.
While Texas is ranked high for economic freedom, there are several notable areas of deficiency that need improvement. While some of these were on the call, they weren’t addressed and should be studied during the interim for swift implementation next time in 2019.
1) Eliminate the business franchise tax, not included in the call.
The Tax Foundation ranks Texas 49th for its corporate tax burden, worse than every state except Delaware. A big reason is that Texas is one of few states to even levy this particularly burdensome tax, which is a tax on a firm’s gross receipts. Eliminating this tax would make it easier for Texas businesses to expand and hire new workers.
2) Reform property taxes, included in the call but not passed.
The property tax burden in Texas ranks sixth-worst nationwide. Residents across the state have seen huge increases in recent years. Either SB 1 or HB 4 would have provided much-needed structural property tax reform by triggering an election for local voters to approve increases in property tax revenue by local jurisdictions of more than a certain threshold. Neither made it to the governor’s desk.
3) Restrain budget growth to cut taxes, not included in the call.
One option is to cut the sales tax rate. Most Texans pay a combined state and local sales tax rate of 8.25 percent. Only nine states have a higher rate. By restraining government spending, excess money could be put toward reducing the state’s sales tax rate or other taxes, providing much-needed relief.
4) Enact a stringent spending limit, included in the call but not passed.
To not excessively burden taxpayers with funding government services, population growth and inflation are key metrics that reflect that burden. One represents the increase in number of residents while the other tracks closely with wage growth over time, collectively providing an increase in funding to government that probably doesn’t overly distort each individual’s ability to satisfy his or her desires. Either SB 9 or HB 208 would have been terrific steps to enacting an effective cap on government spending that limits increases to no more than the rate of population growth and inflation, but neither made its way to the governor.
5) Increase state budget transparency, not included in the call.
Many government programs continue to get funding years after they are no longer needed. Requiring agencies to explicitly justify the need for their programs on a biennial basis through the practice of zero-based budgeting would make it easier to eliminate those that are unnecessary while making it easier to provide tax relief.
6) Reduce government regulations, not included in the call.
The Legislature recently took a step to address the growth of the regulatory burden by passing a law that requires the state to remove one regulation for every new regulation created. Requiring that all regulations “sunset” after a certain period would go further by actually reducing the number of regulations on the books.
Residents and businesses vote with their feet in response to policy differences. Texas is widely regarded as a top business-friendly state; the flood of new businesses into the state in recent years is testament to that reputation. However, like any sort of reputation, maintaining good standing requires constant vigilance.
These six reforms to tax, budget, and regulatory policy would help increase economic freedom and individual liberty in Texas. While none of these were addressed in the special session, they should remain high priorities by the 86th Legislature to provide relief to taxpayers and put Texas at the top when it comes to economic freedom and associated prosperity.
Vance Ginn, Ph.D.