The Boom Begins in Texas

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With so much talk about tax policy these days, and with federal taxes scheduled to go higher next year, it's important to remind ourselves of how important fiscal policy (especially higher tax rates and bigger government spending) can be. The US states, because they share a single currency, provide a relatively clean incubator for judging the impact of fiscal policy decisions. In that vein, California and Michigan, two of the highest taxing and biggest spending states in the country, are clearly suffering relative to Texas, one of the lowest taxing and least spending states in Union.

Gathering data from the The Tax Foundation and the BLS shows the trends. California, with the highest sales tax rate in the nation and the 4^th highest income tax rate, has been hit very hard by the recession. The unemployment rate in California is 2.8% above the national average. And all that spending (22.3% of state GDP) hasn't helped. In fact, the bigger the state budget, the less room for entrepreneurship.

Michigan is in a similar situation. While Michigan's income tax rate and sales tax rate are lower than California's, Michigan levies other damaging taxes such as the 0.8% gross receipts tax and a bank net capital tax of 0.235%. With such a heavy tax burden, it's no wonder that Michigan's economy is one of the worst in the nation. Over the last 30 years, Michigan's unemployment rate averages 8.2%, well above the 6.3% national average.

On the other side of the tax spectrum is Texas, which has no personal or corporate income tax and a relatively low sales tax. Texas also has low unionization and far less spending as a percent of state GDP than California and Michigan. Predictably, Texas has fared well during the recession and has a lower unemployement rate. Today, the unemployment rate in Texas is 8.1%, below the 9.6% rate nationally and far below the unemployment rates of California (12.4%) and Michigan (13.0%).

The results of these different local tax and spending policies is striking when you compare unemployment rates. At the federal level, the same rules apply and if the US truly wants more jobs, then less spending, less taxes and more freedom are the answer. Capital seeks the place where it is treated best. In the 50 states, Texas stands out.

Posted on Friday, October 22, 2010 @ 3:47 PM

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.