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Policy Forum: Contrasting economic policy in California and Texas

Sep 27 2021

Talk about the rivalry between California and Texas is getting louder — and it seems, at first glance, for good reason: The Lone Star State’s population is surging, thanks partly to an exodus from the Golden State.

But is Texas — with its low taxes, low services, and low regulation — really the better place to live and work? And is the California dream — with its high taxes, high services, high regulation — dying?

At its annual fall Policy Forum, the Stanford Institute for Economic Policy Research (SIEPR) joined forces with the LBJ School of Public Affairs at the University of Texas at Austin to go beyond the headlines and look closely at the economies of the country’s two most populous states. Economic juggernauts, they also rank among the world’s largest by GDP.

SIEPR Director Mark Duggan joins Stanford students who gathered to
watch a livestream of the fall Policy Forum.

IMAGE CREDIT: RYAN ZHANG

“If we put the rivalry and politics aside, there’s a lot to be learned from a close examination of the actual policies that led these two very different states to where they are today,” said Mark Duggan, the Trione Director of SIEPR and The Wayne and Jodi Cooperman Professor of Economics, in his opening remarks.

The event, held virtually on Sept. 24, featured lively discussions by top experts on the states’ radically different models for economic growth. Hundreds of academics, business leaders, and policymakers tuned in, as did students from Stanford and UT-Austin.

“It was a great opportunity,” said Rachel Kim, one of dozens of Stanford students who gathered at SIEPR to watch the event live. Kim, a junior studying public policy with an emphasis on health care and human rights, is the residential assistant at Otero, a university dorm for students interested in public service and civic engagement.

“It was very exciting to introduce my residents to SIEPR to help them learn more about economic policy,” she said.

Below are highlights of the event’s four panel discussions. You can view the recorded sessions here and get more information on the panelists from the forum agenda.

And for a deeper dive on the tale of these two states, check out the related SIEPR Policy Brief.

Key differences, captured in data

The policy brief co-authored by Duggan and Sheila Olmstead, a professor at the LBJ School, anchored the panel discussions, which delved into taxes and business regulation, energy and the environment, and health care.

JR DeShazo, the new dean of the LBJ School, kicked off the event noting the policy brief's rich detail and “clear-eyed focus” on the evidence showing what’s working and what isn’t for each state. The data indicate, for example, that California is losing out to Texas by population growth, but it is far ahead on per-capita income and GDP growth.

Duggan and Olmstead pointed, too, to challenges facing each state. California, for one thing, is grappling with an extremely tight, costly housing market and a rapidly growing homeless population. Texas has the largest share of residents without health insurance. And while both have become powerhouses in renewable energy production, rolling blackouts in California and days-long electricity outages this winter in Texas point to serious problems.

DeShazo said Texas is at an inflection point. The state economy, he noted, historically has been driven by private-sector investments in oil and gas, petrochemicals, logistics and distribution, and agricultural commodities. Now, with more people and companies moving to Texas — notably from California — Texans are excited about what that potentially means for future jobs and prosperity.

“Maybe we’re going to start incubating new companies and there’s going to be a lot of innovation,” DeShazo said. To do that, the state needs to invest more in higher education and other ways of generating knowledge. “We don’t want to be (just) a low-cost labor state.”

DeShazo, like most of the Policy Forum speakers, brought a personal perspective on both states to the discussion. Before his recent move to Austin, he lived in California for 24 years. He sees huge risk in California’s status as an innovation behemoth because of its sky-high cost of living, worsening homelessness, and a severe housing crisis.

“The challenge for both states is we can’t rest on our laurels,” said DeShazo. “California has been through many, many peaks and troughs. Texas has gone through many, many peaks and troughs. The question is, ‘How well-positioned are we to take advantage of the next competitive opportunities?’”

On growth, taxes and business

When it comes to taxes, California and Texas are on opposite ends of the spectrum. California has, at 13.3 percent, the country’s top marginal tax rate on individuals and, at a rate of 8.84 percent, a corporate income tax that ranks among the nation’s highest. Texas doesn’t have an income tax but instead raises revenues largely through property and sales taxes.

Two policymaking veterans tasked with contrasting the two approaches didn’t mince words during the discussion moderated by Christina Kent, a Stanford economics PhD student.

First up was Chuck DeVore, a former California state assemblyman and now vice president of national initiatives at the Texas Public Policy Foundation.

“What I find just shocking and amazing at the same time is that California, a state that prides itself on programs to help the least fortunate, doesn’t do all that well for that segment of society,” DeVore said in comparing the states’ poverty rates against the national average.

California has also paid a hefty price for its anti-business policies, he said, which have driven out manufacturing and other commercial activities.

At the same time, DeVore said, the rap Texas gets for its small government and “modest” services is largely “based on incomplete facts or, frankly, just falsely-stated premises.”

Lenny Mendonca, a former chief economic and business adviser to California Gov. Gavin Newsom, similarly contended the Golden State has been misunderstood. For instance, while California has the nation’s top marginal income tax rate, its median rate is only 1 percent more than it is in Texas, he said.

And California’s biggest challenge isn’t a regressive tax policy that hits its wealthiest residents — it’s the real estate crisis and the ability of powerful interests to block housing development, he said.

“What is actually happening is there is much more demand to live in California and there are many more jobs being created than there are houses (being built),” Mendonca said.

California’s model for economic growth — supported by its renowned universities and startup ecosystem — isn’t broken. “I wouldn’t bet against (California’s) science- and innovation-based economy,” he said.

Despite their state allegiances, DeVore and Mendonca agreed California and Texas can learn from each other.

DeVore cited California’s investments in transportation, education, and water management, and its Prop 13 property tax structure. Mendonca said California could take a page from Texas to streamline regulations, build housing faster, and signal better its support for businesses.

On energy & the environment

If you really want to know which way the wind blows in California and Texas, look at their renewable energy production. In 2020, 22 percent of California’s energy came from solar and wind; in Texas, 25 percent did.

California built its solar power capacity largely through policymaking and a financial windfall from drops in natural gas prices in recent years, said Frank Wolak, a SIEPR senior fellow and faculty director of the institute’s California Policy Research Initiative (CAPRI).

Meanwhile, Texas cut electricity rates thanks to its natural gas bonanza and handed its vast open spaces to privately-financed wind development, according to Michael Webber, a UT-Austin professor of mechanical engineering. In a session moderated by Olmstead, whose research focuses on environmental and energy policy, Wolak and Webber dug into the energy policy differences between the two states.

One result of these varying approaches, according to Wolak: While both states pay similar wholesale energy prices, California residents pay roughly twice as much as Texans.

“In terms of what consumers pay, Texas wins hands down,” said Wolak, who is the Holbrook Working Professor of Commodity Price Studies.

But Texans are the country’s second-worst polluters, Webber said.

“We drive large cars long distances,” he said. “We have large homes that we air condition.” And the state’s large industrial sector is also to blame, he said.

But an overall move to cleaner energy production is helping Texas shrink its carbon footprint faster than California.

“The civic leadership of Houston doesn’t care about climate change,” Webber said. “But they do care about the fate of Houston [and the] 500,000 jobs at risk” in a low-carbon energy future.

Last winter’s crippling storms in Texas and California’s frequent power shutdowns during hot and windy conditions expose big problems with grid reliability and safety.

But Wolak and Webber said solutions can be found in western Europe, where significant power outages are largely avoided thanks to heavy investments in underground transmission lines and other safeguards.

Both agreed, too, that California — where political and business interests are generally aligned — is better positioned to lead toward a greener future.

“California will develop the solutions and Texas will steal them,” Webber quipped.

On health care & Medicaid

There’s no debate on this, either: California spends big on public health care services and other non-medical support linked to better health outcomes. Texas does not. California was an early adopter of Medicaid expansion allowed under the Affordable Care Act. Texas has declined to grow its Medicaid rolls. As a result, one in three Californians are insured under Medicaid; in Texas, it’s one in six.

Duggan, an expert on Medicaid and health policy, and Olmstead write in their policy brief that these differences in Medicaid coverage explains why poverty rates are higher in Texas than they are in California.

The opposing health policy approaches reflect the deep philosophical and political divisions between the two states, said the two speakers in the session on health care moderated by Duggan. Those differences, they said, have also been reflected in the states’ divergent pandemic responses.

Texas is betting that sustained economic growth from its business-friendly policies will meet the needs of its health care residents, said Mark McClellan, a health policy expert and former Federal Drug Administration commissioner who is now a professor at Duke University. As more people move to Texas, he said he expects it will lead to more pressure on policymakers to improve health care services.

“Changes are coming in Texas,” McClellan said. “There are going to be some growing pains and challenges.”

For now, Medicaid expansion in Texas is a non-starter given the political climate, he said. But there are innovations happening, such as through regional programs, to support low-income residents.

In California, “policymakers and the public alike have a fundamental belief that government has a meaningful role to play in the health of residents,” said Kara Carter, the senior vice president of strategy and programs at the California Health Care Foundation and former McKinsey & Company partner.

There’s an economic rationale, too, Carter said: “It creates a better economic outlook for the state by allowing people to fully participate in economic activities without the burden of trying to figure out how to pay for health care in the same way.”

Still, California’s high spending doesn’t necessarily lead to meaningful solutions, said Carter. She cited the state’s “dismally low” Medicaid reimbursement rates and chronic homelessness as examples.

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