The Texas Tax Miracle: The Tax and Government Policies That Prevented a Recession

By  | 

The recent recession has been a nightmare for the American economy. Many states are still recovering from high unemployment, unstable housing markets, and a collapse in their tax bases. However, this suffering hasn’t been felt everywhere. Thanks to certain Texas tax and government policies, the Lone Star State has barely felt the harmful effects of the Great Recession. But what are these policies that magically shielded this state?

Policy 1: Encourage Immigration Through Low Cost of Living

People want to live in Texas. From 2000 to 2012, the population of Texas grew 24.4 percent, primarily from migrants leaving other states. Why the move? Life in Texas is attractive because of its lack of income tax. This means workers keep more of their paychecks, retirees keep more of their savings, and more money stays in the Texas economy. On the other hand, states with the highest tax rates, such as New Jersey and New York, are losing residents.

Another advantage of Texas’ low tax rates is that they keep prices lower. Business owners can charge less because they owe less to the government. As a result, even though average wages are lower in Texas than in California, Texas residents have a better quality of life. Adjusting for cost of living, the average resident of Texas has about 4.6 percent more income than the average California resident.

Policy 2: Encourage Business Investment Through Tax Policy

Texas tax policies have helped businesses save money while boosting the overall state economy. In 2014, CNBC rated Texas as the number two state in the country to do business (Georgia ranked in first place). Business owners love Texas because the state doesn’t charge corporate income taxes, leaving companies with more money to invest in new jobs, factories, and stores. These policies make Texas a much more attractive place to do business than California or New York, which fell near the bottom of the rankings at 32 and 40, respectively.

Texas tax rates have also created a more diverse economy than some might think. The state has a reputation for basing its economy completely on oil and gas, but while this is an important industry, it isn’t the biggest one. In 2012, the entire mining industry only accounted for 9.8 percent of Texas’ gross domestic product. In comparison, 14.5 percent came from manufacturing. In response, factories and jobs are moving to Texas because of its tax policies.

With a strong consumer and business base, Texas’ economy stayed strong during the Great Recession. From January 2000 to April 2013, American job growth was a dismal 3.6 percent. Texas’ nonfarm payroll growth? 19.7 percent!

Policy 3: Prevent Housing Bubble by Avoiding Restrictive Land Policies

Most states make it difficult for developers to build new properties, and these restrictive land policies were one of the main causes of the recent housing bubble. During the bubble, prices skyrocketed in such states as California, Florida, and Nevada because there wasn’t enough supply. When prices eventually fell, they collapsed, dragging state economies down with them.

Texas’ land use policies make it much easier for developers to build new homes. During the bubble, the state’s housing supply kept up with its population, and there were no large price increases. When the bubble burst, it barely put a dent in the average prices of homes in Texas. As a result, residents didn’t see their wealth disappear, the government continued collecting property taxes, and the Texas economy kept right on going.

As America gets back on its feet, state governments are figuring out how to avoid getting into trouble again. Adopting the policies that helped create the Texas tax miracle could be a good start.