Every now and then, we come across something that is simple and says it all. When comparing California with Texas, U-Haul says it all. To rent a 26-foot truck one-way from San Francisco to Austin is $1,840, and yet the one-way charge for that same truck from Austin to San Francisco is just $676. When more people want to move from San Francisco to Austin than vice versa, U-Haul must recoup the cost of getting empty trucks back from Texas and ready for the next person in the exodus.

The great thing about this example is that it’s a market price set in the real world—you don’t need to rely on a fancy economic model to see the point. People and businesses are voting with their feet, choosing Texas over California.

These population shifts do not reflect some arbitrary change in geographical preferences. People respond to incentives, and people are drawn to Texas by opportunity. Texas’ overall economic growth and income growth have exceeded California’s for the last decade, and since 2009, Texas has been responsible for 45% of the net new jobs created in the United States. In turn, Texas’ impressive economic performance is no accident; rather, it is the result of a strongly pro-growth economic policy atmosphere, reflected in low taxation, restrained government spending, and a less burdensome regulation.

Taxation

Let’s first consider the burden of taxation in Texas and California, beginning in particular with the tax burden on labor. People do not work to pay taxes. People work to earn the highest wages, after taxes. High or rising taxes on labor reduce workers’ after-tax wage, reducing the incentive to work. As a result, people have an incentive to leave a state with high taxes on labor income and relocate to a state where the taxes on labor income are lower, demonstrating George Gilder’s famous maxim: “High tax rates do not redistribute income, they redistribute people.” As people respond to these incentives, income growth, employment growth, and overall economic growth suffer in the state with high or rising taxes

California levies a progressive income tax system—as people’s income increases, the tax rate on the higher income increases. California imposes one of the highest top marginal state income tax rates in the country at 10.3 percent, and the marginal tax rate on the median household is 9.3 percent.

In contrast, Texas does not impose a state income tax. By definition, the marginal income tax rate for both the highest income earners and the average worker are zero percent. The practical result of this is that the median worker in California can achieve an after-tax raise simply by finding a job at the same wage in Texas. Texas derives a clear competitive advantage from its lack of an income tax.

In addition to the negative incentives to work, California’s progressive income tax code largely explains why hard times seem to hit California harder than other states. Tax progressivity exaggerates the normal ups-and-downs of the overall economy: when times are good, California citizens earn more and move into higher tax brackets, thereby giving the state a larger fraction of a bigger pie. But then an opposite effect holds true during recession: People earn less income in general, thereby shrinking the tax base even as many fall into lower tax brackets and pay a smaller fraction of smaller paychecks. If the state committed to a higher than efficient spending path when times were good, budget crises are likely to emerge when times are bad.

Next, consider the variety of taxes that constitute the tax burden on capital. California has an advantage over Texas in that it has a lower property tax rate as a result of Proposition 13. But Texas overwhelms this advantage with lower taxes on corporate income, interest income, and capital gains income. The after-tax interest and capital gains income for a $1,000 investment is 11.5 percent higher in Texas than in California for the exact same investment. As a result, Texas gains a significant competitive edge vis-à-vis California in attracting businesses and investors.

The final significant tax area, the tax on consumption, is essentially a wash between the two states. While Texas has a lower sales tax rate, California has a marginally lower sales tax burden. (Found by dividing sales tax revenue by total state income.)

With every other tax category in Texas’ favor, the Lone Star State clearly maintains a more competitive economic atmosphere with regard to overall taxation than California. Just as important as the current statistics on taxation are the ongoing trends, and again the signs are not encouraging for California. Where Texas’ tax burden, smaller than California’s to begin with, has been falling in recent years, California’s tax burden continues to rise.

Regulation

Texas also gains a significant competitive advantage through limited regulation when compared with California. Just like excessive taxes, excessive regulation raises the costs of doing business, thereby stunting economic growth. For example, high levels of worker’s compensation increase the costs from employing additional workers, increasing unemployment and decreasing a state’s potential economic growth. Texas’ average workers compensation costs are 11% less than California’s, making it significantly more appealing to add workers to a payroll in Texas.

Minimum wage is another significant regulatory policy. Where Texas requires businesses to meet only the federal minimum wage of $7.25 an hour, California mandates that businesses pay a minimum wage of $8 per hour. Minimum wage laws can have only one of two effects. Either the minimum wage is below the wage that would be paid to any employee, so it is irrelevant; or, the minimum wage law raises the wage costs for employers, leading to greater unemployment. By imposing a minimum wage in excess of the federal minimum wage, California is unnecessarily increasing employer costs, thereby reducing business flexibility and overall employment in the state. These effects do not exist in Texas, providing Texas’ regulatory environment with another comparative advantage.

A final regulatory aspect to consider is a state’s treatment of unions. States are divided into two distinct categories with respect to their union organizing laws. They are either right-to-work, which means workers have the right not to join a union, or non-right-to-work, which means that workers are forced to join a union and pay dues if they work in a unionized industry. The evidence points overwhelmingly to the fact that right-to-work states have much greater growth of employment than non-right-to-work states. Texas is a “right-to-work” state; California is not.

Spending

The final policy area, spending, impacts the state economy for two reasons. First, before the government can spend revenues it must first take money away from the private sector. As governments get larger and larger, the value of the dollar taken away from the private sector is greater if it were spent in the private sector than the value of the money if the government spent it. As a consequence, government spending lowers the total potential output in the state. Second, larger government spending today oftentimes begets even greater government spending and activity tomorrow. In other words, the threat of higher tax and regulatory burdens grows as the size of the government grows.

California’s spending record is dismal in comparison with Texas. Texas’ current expenditures per capita are 44 percent smaller than California’s per capita expenditures. Furthermore, California’s expenditures have grown at a higher rate than Texas’ in recent years. Therefore, the gap in expenditure between Texas and California will only grow in the years to come. Higher future taxes, increased fiscal crises, and slower economic growth will all follow as a result of the rising government expenditures in California. In the area of spending, Texas’ prudence and restraint again give it a significant competitive advantage over California.

Conclusion

Both Texas and California have large populations, plentiful natural resources, and the allure of geography. Moreover, the economies of both states have outperformed national trends. But current policies matter for future economic performance. Texas’ superior policies over the past several years are making the Lone Star State more resilient to economic downturns and will provide powerful tailwinds for the Texas economy going forward. The opposite is true for California. The relative success of Texas gives California policy-makers a realistic goal to shoot for. If they can do it in Texas, they can do it in California, too.

Arthur B. Laffer is Chairman of Laffer Associates, Co-Author of “Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index” now in its 4^th Edition, and the Laffer Center’s Distinguished Chair in Supply-Side Economics.

Mary Katherine Stout is the Executive Director of the Laffer Center for Supply-Side Economics at the Texas Public Policy Foundation.

 

 

When our company recently expanded the number of its restaurants in Texas, I was startled to receive a call from Governor Rick Perry thanking me for our decision.

In the 10 years I’ve been CEO of CKE Restaurants, owner of the Carl’s Jr. and Hardee’s brands, no governor had ever made such a gesture. Perry went further during our conversation and asked what it would take to move our headquarters from California to Texas.

This is a question weighing on many California CEOs right now. Do we grow our businesses here where the tax and regulatory hurdles remain high, or do we relocate to a more business-friendly state like Texas?

CKE’s history in California stretches back to 1941 when Orange County entrepreneur Carl Karcher and his wife Margaret bought a hotdog cart for $311. Today, we have over 72,000 employees, approximately 18,500 of them in California.

We at CKE love California, but the hard truth is this:  California is the most business-unfriendly state in which we operate. While we have kept our corporate headquarters in California so far, our company’s real job-creating engine has already moved.  Our current plans for domestic development are principally centered in Texas where it is easier to build and operate restaurants, unemployment is lower, and consumers can spend more of the money they earn because there is no state income tax.   While we will continue to operate our existing California restaurants, we will be building 300 new restaurants in Texas this decade.

When we open a new restaurant we invest over $1.2 million in the community and create about 25 permanent jobs within the restaurant itself, not to mention the numerous outside jobs supported by our constructing, maintaining, advertising and supplying food and paper products to the restaurant.  Texas’ business-friendly environment is one of the reasons its unemployment rate remains below the national average while California faces one of the nation’s highest unemployment rates, fleeing businesses and a severe erosion of its tax base.  Our 300 new restaurants will create about 8,000 new jobs in the restaurants in Texas and at least 16,000 additional jobs for our suppliers and service providers.  These are jobs we would love to create in California.

What it would take to bring our business development back to California? I would offer the following suggestions:

Reduce out of control permit costs and construction regulation. Excessive fees, oppressive environmental regulations, exorbitant street maintenance costs and unreasonable construction permitting requirements unique to California add up to $200,000 in additional costs for each restaurant and can take up to two years to process through state and local bureaucracies.  On average, the permitting process in California takes about 8 months.  In Texas, it takes six weeks.  That time difference alone materially increases our costs to open a new restaurant.

Allow managers to be paid as managers. California considers General Managers subject to overtime salary requirements if they work 50% of their time in non-managerial tasks.  This is not the case in most states or under federal law.  Our General Managers receive substantial salaries, bonuses and benefits to run their restaurants as entrepreneurs, like they own them.  In the great majority of states, our General Managers can do their jobs as they see fit whether the tasks they choose to perform are strictly managerial or as simple as speaking with guests and busing tables in the dining room.  If you are managing a restaurant and a cook fails to show up, you had better know how to cook and be prepared to do so.  While that is a non-managerial task, it is exactly what you would do if you owned the restaurant.  To avoid costly class action lawsuits on overtime claims in California, many retail businesses, including ours, have had to convert their salaried General Managers to hourly employees so they can do their jobs.   Our General Managers consider this a demotion but we have little choice.  It is simply common sense that General Managers should be classified as managers able run their restaurants as they choose.

Eliminate the overtime work day, pay overtime on a weekly basis. California requires overtime for employees working more than eight hours a day, not just those working over 40 hours a week as in most states. This deprives employees of the flexibility to work six hours one day and make up the time on another. Because managers are also hourly employees, this limits their ability to work more hours on busy days and fewer hours on others without again incurring overtime costs.  We have actually had to terminate General Managers for working overtime; in other words running their businesses as if they owned them, and failing to claim the overtime. A failure to do so would result in the very class action lawsuits we made them hourly employees to avoid.  The reality is that California law is requiring us to fire general Mangers for doing their jobs.  This law also impacts our crew employees who can ill afford to lose working hours in this economic environment.  Such employees may want to work 6 hours on one day, for family or personal reasons or to attend school events, and 10 hours on another day so we can compensate them for a full forty hours.  In California, that is not an option.

Simplify the confusing meal and rest break laws. These laws are so complex that it is difficult for employers or employees to understand the requirements, let alone comply with them.  Opportunistic lawyers often sue companies for minor and often unintentional violations. Employees, including our General Managers, are forced to take breaks during the busiest times of the day, to their frustration as well as that of their co-workers and customers.  You may have seen restaurant employees sitting in the dining room while you wait in a long line for “fast food.”  They are taking their mandatory rest breaks.

Tame the lawyers. With some 200,000 lawyers, California needs to put some limit on their ability to file class action lawsuits against some perceived threat as though each one were his or her own private attorney general. Like many California businesses, our company has wasted $20 million defending such cases in the last eight years, a majority of that money going to the attorneys’ pockets rather than to the creation of economic prosperity.  This is a major impediment to businesses deciding to grow in California as opposed to other states.

Reduce oppressive state taxes. California has some of the highest tax rates in the nation for businesses and personal incomes. The state must lower taxes to retain the businesses it has and to encourage others to locate or expand here.

California is one of the most beautiful locations in the country and California’s labor pool remains, for now, the most creative and knowledgeable in the world. We want to stay and we would like nothing better than re-energizing our job creating restaurant development here in California. But the laws and regulations I have discussed add substantial additional costs to doing business here and create the impression that our State government fails to understand or value the contributions private enterprise makes to the State’s prosperity.  In essence, it is very difficult and expensive to build a restaurant in California.  If you manage to build it, California law makes it onerously difficult to operate.  If you manage to build it and operate it at a profit, you are hit with a big tax.  The decision whether to grow in California or another more business friendly state is really quite simple.

Over the last two years, whenever I tried to discuss these issues with state political leaders, I was either brushed off or told there was a lack of political will for change.  That changed in February when Governor Brown, the Governor’s Office of Economic Development, the Lieutenant Governor and legislators from both sides of the aisle contacted me concerning these issues.  Whether these discussions will result in any progress is yet to be seen, but at least we are talking.

Republican or Democrat, liberal or conservative, any legitimate political agenda requires prosperity for the people of California.  Absent another unsustainable economic surge such as the dot-com boom or the housing bubble, to again experience economic prosperity California must strengthen the fundamentals of its business community by reducing both regulations and taxes.

Andrew Puzder is the CEO, CKE Restaurants and author of Job Creation, How it really Works and Why the Government Doesn’t Understand it

The California Federation of Teachers is sponsoring AB 401 – which if passed would limit charter school growth in California.

In April, Rasmussen Reports released the results of a poll which addresses American voters’ sentiments about our public schools. Some of the more interesting findings are:

• 72% say taxpayers are not getting their money’s worth from our schools, while only 11% think we are.
• By a margin of 41-34 (25% were unsure), those polled said that spending more money on education would not improve student performance.
• 61% believe that public educat ion has become worse over the last ten years. [Read more…]

Join us at Freedom Fest! Come be a part of the world’s largest gathering of free minds at Bally’s Las Vegas from July 14-16, 2011. We will be hosting a panel discussion, featuring Brian Calle, editor of the California Political Review. The following editorial from the Orange County Register provides more details on the exciting weekend of free political thought, discuss and debate.

Originally published June 24, 2011

Anyone curious about the direction of the conservative or libertarian movements, priorities for Tea Party enthusiasts or Republicans – or anyone generally interested in the hottest topics for right-leaning politicos – ought to pay close attention to what happens at Freedom Fest, set for July 14-16 in Las Vegas. This conference may be a bellwether for issues going into next year’s presidential election and could well help shape the debate during the GOP presidential nomination season.

Freedom Fest is dubbed “The worlds largest gathering of free minds,” where some of the most influential free-market, right-leaning intellectuals, business leaders, political pundits, entrepreneurs, activists and economists discuss and debate political and economic issues ranging from the national debt, inflation, foreign policy, public employee unions, technology, drug legalization, school choice, education reform, inflation and health care.

Last year an estimated 2,000-plus attendees filled Bally’s Hotel and Casino for the event. Organizer and founder Mark Skousen hopes participants this year will number more than 3,000.

Scheduled speakers include Steve Forbes, on “Are We Headed for an American Revolution – or a French Revolution?” The libertarian co-founder of PayPal, Peter Thiel, will speak on “Stalled Technology in America: End of the Future?” Whole Foods CEO John Mackey will talk about “Re-Branding Capitalism in the 21st Century.” Register Columnist Brian Calle and contributor Steven Greenhut will speak on public-sector pensions, education reform, California government and military interventionism.

Representatives from the Cato Institute, Reason Magazine, Hillsdale College, the Foundation for Educational Choice, the Heritage Foundation, the Pacific Research Institute and others are scheduled to participate.

Last year’s Freedom Fest reflected the political mood of a large segment of the electorate, and signaled a change in sentiment nationally that ultimately ushered in to office more conservatives and Republicans. This year, we hope the session again delivers greater insights into the political winds of the liberty movement for this election cycle.