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A Leg Up in the Search for Prosperity: Economic Freedom

Despite their very different attitudes toward the role of government, California and Texas have both found success. But the Lone Star State's small-government/low-tax model gives it an edge.

Former Texas Gov. Rick Perry
Former Texas Gov. Rick Perry in Beverly Hills, Calif., in 2013 to lure California businesses to Texas.
Al Seib/Los Angeles Times/MCT
In the interstate economic-development wars, few rivalries can match the long-running one between California and Texas. At a time when so many Americans have such sharply divided attitudes on the proper role of government, these states illustrate the extremes. They're both also thought to be, in their own way, models of success, yet they have very different outcomes.

Texas is best understood as a place where the private sector prevails over the public sector. Among the 50 states, it ranks near the top in economic freedom, a measure of fiscal and regulatory policy, and near the bottom in overall tax burden. It's a state known for building, with Dallas and Houston routinely among the top metros in new home permits and Austin first in the nation for permits per capita since 2004. But state and local government spending per capita is the 11th-lowest of any state, according to data from the Tax Policy Center.

California's the opposite: a state where the government is large and powerful and the private sector is taxed and regulated to support that. It is near the bottom in economic freedom and near the top in overall tax burden. It ranks as one of the most regulated states for land use, highlighted by famously constricted metros like San Jose and San Francisco. It has strict labor laws — high minimum wages, barriers to independent contracting, union favoritism — that are meant to foster a middle class. State and local government spending per capita is the nation's sixth-highest.

So which model has better enabled prosperity? Well, advocates on both sides can point to strong numbers. California and Texas are in the top 10 in GDP growth, the top three in the number of Fortune 500 companies, and first and second in population. They're viewed by their respective ideological tribes as policy innovators — Texas as a place where the working class can buy homes and start businesses, California as a place that cuts carbon, expands entitlements and spurs tech innovation.

But California's model increasingly comes with an asterisk. While its economy looks impressive on paper, fewer and fewer people get to enjoy it. Heavy land-use regulations make housing markets inelastic and expensive, with median home prices more than double the national number. The labor laws, rather than fostering a robust middle class, just make everything more expensive. The faith in and funding of government has not created superior public services, but rather a bunch of state and local bureaucracies that escalated debt by awarding themselves unsustainable pensions. Despite the high taxes — which hit every resident — California has the 10th-highest per-capita government debt; of the nine local governments that filed for bankruptcy between 2010 and 2019, three were in California.

People have responded with their feet. More leave California than move in, and a 2019 survey found that 53 percent of its residents were considering leaving the state, citing high costs. Much of the exodus goes to Texas. California is now the No. 1 exporter of people to the Lone Star State. It's not that California is losing population: Since 2010, it has gained 2.3 million residents. Meanwhile, however, Texas has added 3.9 million, more than doubling California's population growth rate.

And it's not just people. Businesses are leaving California too, at an estimated annual clip of over 1,000. For 12 straight years Texas has been the biggest recipient of businesses leaving California. Texas has long sought to capitalize on and accelerate that trend, even running ads in California touting Texas' business friendliness.

More than data, though, it's the feeling of what can be accomplished in a state that emphasizes freedom versus one strangled in red tape and high taxes. Houston ended veterans' homelessness in part by cheaply building large supportive housing projects; California cities have spent billions fighting homelessness, but still have tent cities because it costs so much to build affordable housing there. Dallas has, over three decades, built the nation's longest light-rail system, and a private company is planning high-speed rail between there and Houston. California metros have struggled to add capacity to their transit systems, and last year the state's high-speed rail project lost federal funding due to ongoing delay. Perhaps most damning is an annual survey by Chief Executive magazine asking CEOs nationwide to rank state business climates. Texas has been first for 15 straight years, and California in last place for five.

This should be a wake-up call both to Californians, to fix the flaws within their government, and to those who want to make the California model national policy. While it aims to help people, it ultimately inflicts costs that drive them out. The fact that many of these people go to Texas speaks volumes about which model really works.


Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.

A journalist who focuses on American urban issues. He can be reached at scott@marketurbanismreport.com or on Twitter at @sbcrosscountry.
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