Texas Gov. Rick Perry upset the governors of California and Illinois recently by making trips to those states and publicly inviting businesses to move to Texas. Illinois Gov. Pat Quinn called the trip "an escapade," and boasted that his state could compete with any other.
The truth is, however, it can't.
Perry's recruiting trips may not have been diplomatic, or even polite, but they called attention to a larger economic truth. Money, as the saying goes, is a coward. It prefers to leave places where it finds itself under attack and flee to where it can thrive.
Plenty of factors enter into a decision to shift locations. One large one, however, is the tax policy of the state and local government in which the business resides.
The Great Recession exposed burdensome tax policies in some states and brought favorable attention to positive policies in others. It hurled many states into public pension deficits that have challenged the leadership and innovative abilities of politicians and bureaucrats. It also has spurred changes.
Governors would do well to pay attention.
Because states, with their open borders and freely moving citizenry, have to remain nimble and competitive, they serve as laboratories for fiscal policy. What they collectively have taught since the recession began is instructive for states, the federal government and even individual households.
The bottom line is that frugality counts, as does living within your means. And, regardless of political slogans, tax policies do affect behavior and job creation.
A newly released report from the American Legislative Exchange Council studies the tax policies and relative competitiveness of all 50 states. The report, "Rich States, Poor States," was written by noted economist Arthur Laffer, Wall Street Journal editorial writer Stephen Moore and ALEC's director, Jonathan Williams. It finds not only a strong correlation between pro-growth tax structures, fiscal discipline and prosperity, but it demonstrates how these things translate into the movement of wealth across state lines.
It compiles statistics from the IRS to show how more than $2 trillion in wealth has moved across state lines over the past 15 years. Capital and humans may have been held in place somewhat by the uncertainties of the recession, but with the economy apparently in recovery, they are more mobile now than ever.
That means that even without its governor making recruiting trips, Texas is poised to pull money away from other states. The Lone Star state already gained four congressional seats in the last Census, while New York lost seats and California stagnated. It also grew by 18 percent in population and increased dramatically in terms of its share of the nation's total economy.
The report outlines "10 golden rules of effective taxation." In general, these outline basic truths, such as that the more a government taxes something, the less it can expect to receive of that thing, or that raising taxes on one source of revenue is going to reduce revenue from other sources, as well.
Co-author Williams told us he has seen some states make dramatic changes in recent years to become more competitive, from passing laws against compulsory union membership to reducing corporate taxes. In Kansas, for instance, these changes have led to a reduction in the unemployment rate from 7 to 5.5 percent. A lawmaker in neighboring Missouri has complained that these changes make it harder for his state to compete for business.
The top five states in the report — Utah, North Dakota, South Dakota, Wyoming and Virginia — all are experiencing strong growth as the nation recovers, and much of that growth is coming from other states.30 comments on this story
Fiscally responsible, transparent states become more attractive to investors, just as responsible and prepared adults are attractive to employers. Likewise, the federal government, which competes with the rest of the world for business, could become more attractive with a simplified, business-friendly tax code that more closely aligns revenues with expenditures.
The proper response to a hostile visit from the Texas governor is not anger. It is to reassure businesses through a simple and transparent tax structure that plays no favorites and leaves commerce mostly alone. A lot of states are demonstrating this convincingly.