In Texas, Economic Freedom Produces Innovation and Growth

The United States is in the midst of an economic paradigm shift as evidenced by the evolution of state-level economies. States that used to be bastions of economic innovation are experiencing decline, while other states pick up the slack and replace them on the cutting edge of industry. In terms of public policy, the key to this shift lies in economic freedom and pro-growth tax and regulatory policies; states are realizing these policies are more likely to grow their economies rather than levying high taxes. Data show states with lower tax burdens vastly outperform their high-tax counterparts in nearly every category.

For evidence of the economic innovation paradigm shift, consider the mass migration of the tech sector to states like Texas, which now takes the number two spot in the TechAmerica report on U.S. tech jobs; or Nevada, whose tech sector growth was almost double the national average in 2012. While California maintains the top spot in current technology employment, in 2012 the tech sector in Texas grew just under 20 percent faster than did California’s technology industry.

In 2012 Apple announced it would double its presence in Texas and invest more than $300 million dollars in a new Austin campus, generating an estimated 3,600 new jobs in Texas. Simply put, California may currently have more tech jobs than Texas, but the high tech industry is growing faster in the Lone Star State than in Silicon Valley. Furthermore, California’s total employment shrank by 2.3 percent over the past ten years, while total employment in Texas grew by 12.4 percent.

The financial sector is another leader in economic innovation because it provides necessary capital for growing an economy. Here again, the old guard of the U.S. financial sector was traditionally rooted in Wall Street and California, but between 2001 and 2011, Texas led the nation in financial sector job growth. During that period, Texas added more than 47,000 new financial jobs. North Carolina came in second, with more than 16,000 new financial jobs. The Winston-Salem based bank BB&T recently announced a plan to add another 1,700 jobs in North Carolina over the next few years. This announcement follows a major tax reform plan enacted by the North Carolina legislature in 2013.

Arizona, South Carolina and Iowa rounded out the top five states for financial sector job growth. No-income-tax Florida is also becoming a hub for hedge funds moving out of New York. Almost 30 hedge funds have made the move in the past few years and this trend doesn’t seem to be slowing down anytime soon. Meanwhile, California and New York lost 70,600 and 64,400 financial jobs during the same time period.

Over the past decade, the nine states without a personal income tax—which includes Texas—grew their populations 149 percent faster than the nine states with the highest personal income tax rates. The states with no income tax grew their economies 18.3 percent more than their high-tax counterparts and experienced 7.8 percent more job growth. This trend holds true for traditional economic indicators, as well as cutting-edge industries at the forefront of innovation and growth.

There is a clear difference between levels of growth in these cutting-edge economic sectors. California and New York may still have higher levels of employment in these areas, but states like Texas and North Carolina are winning on growth. The more money people and businesses are allowed to keep translates into more investment, more research and development, and more overall economic growth.

The results are clear: economic growth in both traditional and highly innovative economic sectors is best achieved when people can keep and direct their own money. Government will never be a better venture capitalist than the individual. As California and New York slowly decline, low-tax states like Texas, Florida and North Carolina will become the new drivers of America’s innovative economy. While Silicon Valley and Wall Street—conventional hubs of innovation—will always be located in California and New York, the next breakout regions to drive economic innovation and growth will be in places like Austin, Raleigh, and Salt Lake City.

In Depth: Cronyism

Cronyism in tax policy stifles innovation, hinders competition and introduces a deep temptation for corruption. The 2014 ALEC Center for State Fiscal Reform study, The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth, found that in the most recent year in which states published their respective tax expenditure…

+ Cronyism In Depth