THE BEST SIDES OF FISCAL POLICY IN TEXAS
July 14, 2009
The Texas model of government has weathered the recession well, indicating that it should be considered when federal lawmakers decide how best to govern the United States. One of the state's many advantages is its low tax burden (second-lowest in America), says the Economist.
One of the most important determinants of whether a state does well or badly, says economist Arthur Laffer, is not just the overall level of taxes but their structure too. A high, progressive personal income tax, he says, is about the worst incentive-killer you could devise. Americans are highly mobile, so the most able will simply leave for another state.
According to Laffer:
- The nine states with a personal-income-tax rate of zero had net domestic immigration of 4.5 percent of their population in the ten years to 2007.
- The nine with the highest marginal tax rates saw outflows averaging 2.2 percent.
- A high state tax on capital gains is also bad, because it tends to be volatile, causing big budgetary problems.
- Texas doesn't have a state capital gains tax either.
Next on its list of advantages favoring Texas is the feeble state of its unions, says the Economist:
- Texas, like 21 others, mostly in the South, is a "right to work" state, so no one can be compelled to join a trade union.
- Only 4.5 percent of its workforce is unionized, against 12.4 percent nationally.
- And even where unions are well represented, as at the port of Houston, the management says they behave sensibly.
The state's sound public finances are often noted too, says the Economist:
- In the landmark legislative session of 2003 (Texas's legislature meets only every other year, for 140 days) Texas eliminated a budget deficit of close to $10 billion and has not looked back.
- Since 1988 the state has maintained a "rainy-day fund," paid for by taxes on oil and gas companies, which is now worth $6.7 billion.
- This fund can be raided only if two-thirds of both houses of the state legislature agree.
Source: Editorial, "Tex-Mix: The State's Best and Worst Sides," Economist, July 9, 2009.
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