Fixing Our Economy: Why Not Let the States Lead

By Bradley "Brad" Allen

This Editorial describes how we should use the states as Laboratories of Democracy, and follow the pro-growth ideas that seem to be working. In other words, use what is working in real life, rather than an ideology.

A good place to start may be to compare the policies of Texas and California, as they epitomize the different approaches advocated by each political party. Texas has become more economically competitive while California has become less so, resulting in a huge net migration of jobs from California to Texas. When asked why Toyota was moving to Texas, the response by its CEO was typical; lower taxes, fewer regulations, and reduced energy costs.

Texas has no state income tax, while California's top 13.3% marginal rate is the highest in the country. Like California, the U.S. has the highest corporate tax in the world; and in case you've heard that this tax rate is offset by generous deductions, you should know that according to PricewaterhouseCoopers, we also have the highest effective tax rate. Moreover, these high taxes fall disproportionately on small businesses, with the most common types (S-corp and partnership) paying more than double the effective tax rates as many big corporations. This hurts job creation, as small businesses generate 66% of the new jobs.

If we want to emulate Texas, we need to close tax loop-holes to make a fairer flatter tax system that doesn't just benefit the largest corporations, and lower overall tax rates to make us more competitive with the rest of the world and encourage investment.

Regulations are "light" in Texas, whereas California has one of the highest regulatory burdens. A California State University study found the total loss of gross state output for California each year due to regulatory cost was $492 billion, which is equivalent to the loss of 3.8 million jobs each year.

Like California, the United States is a regulatory nightmare. Today, there are 3,305 federal regulations in the pipeline, and the 2013 Federal register contained 80,000 pages of new rules, regulations, and notices. Small businesses spend more than $10,500/employee, per year on regulatory costs, and according to the American Action Forum (AAF), the federal government in 2012 imposed nearly 87 million hours of paperwork burdens on the economy. George Washington's Regulatory Studies Center found that the cost of regulatory rules in 2012 under President Obama exceeded the cost of all rules in "the entire first terms of Presidents Bush and Clinton, combined." Worse, according to the AAF, "Overall regulatory activity in 2013 was up over 2012 because the administration delayed some rules until after the 2012 election."

To follow Texas, America must lesson its regulatory burden. We need to institute a cost benefit analysis of each new regulation before they are enacted, as well as review existing regulations, to determine their value. Congress should examine what has been done to reduce the regulatory burden in other countries and individual states, and copy the best initiatives. Federal agencies should be required to seek Congress's approval before putting major regulations into effect. Finally, all regulations should have expiration dates to prevent out-of-date rules from remaining in force.

Electricity prices are about 50-88% higher in California compared to Texas due to California's renewable-energy mandate and cap and trade legislation, and its gas is 70-80 cents per gallon more expensive because of taxes and blending requirements. Texas's oil production recently doubled, California's declined.

Like California, energy costs in the U.S. have skyrocketed in the last 5 years, with the price of a gallon of gas doubling. Energy prices are slated to go even higher with the proposed new EPA rules the President will introduce on June 2nd. Dependence on foreign oil is a threat to both our national and economic security. Presently, we import 9-10 million barrels of oil into the United States every day. At approximately $100 per barrel, this means we are sending roughly $1 Billion dollars out of the U.S economy every single day, often to countries that don't even like us. In March alone, we imported 281 million barrels, and sent $30.3 Billion overseas. Fuel Freedom Foundation estimates that if the money shipped overseas for 1 year was kept in the US economy, it would raise GDP by 2.5%, and create 3 million jobs.

To be more like Texas we need to increase energy production in the U.S. while we continue to develop alternative sources of energy. Options include reducing burdensome governmental regulations, approving the Keystone pipeline, increasing production of domestic oil and gas, and expanding the use of nuclear power, to name only a few.

Those against increasing U.S. production must remember there are adverse consequences to their actions. When high energy costs transfers jobs overseas, the energy needs in that country increase, which is why China and India are building one new coal plant every week. Thus high energy costs not only ship jobs overseas, they may worsen the environment, since overseas coal plants, free from U.S. regulations, are the most polluting of all power stations. Is this scenario really better?

These economic findings are not unique to California and Texas; they are evident when you compare other "red state" policies to neighboring "blue states". Just compare Illinois to Wisconsin, Indiana, Michigan, or Ohio. Like Texas, these "red states" are flourishing economically, whereas Illinois has an explosive state debt, significantly higher unemployment, and the slowest personal income growth in the Great Lakes region.

State policies also affect income inequality. According to a new study by Richard Barrington at MoneyRates.com, "Income inequality is worse in blue states, and has also grown more quickly." A government workers union (AFSCME) report says California has the third-highest income inequality gap in the nation, and when you take into account cost of living, the gap between states like California and Texas grows even wider.

The city of Los Angeles epitomizes the problems these "California" policies are creating. According to the Los Angeles 2020 Commission, Los Angeles added one million new residents between 1980 and 2010, but lost 165,000 jobs. L.A.'s poverty rate of 17.6% is higher than any other major American city, and the middle class shrinks year after year. Proportionately, there are 42% more poor people in California than in Texas.

There are other impediments to job creation that don't have state parallels, perhaps the biggest being Obamacare. These must also be addressed. But the facts seem plain with respect to taxes, regulations, and energy costs. As a doctor and small business owner, I know the best way to make decisions in the real world is with facts, not ideology or political talking points; otherwise businesses go broke, and patients die. Isn't it time our federal government acted the same way? It's not big versus small government: it is a government that works for us, not against us.