A Tale of Two States

By Jimmy Threatt

The economic crisis gripping America has brought to the forefront of the political debate the argument concerning how much a government should tax and spend.  This spirited debate is often caught in the middle of political arguments between left and right wingers.  However, the dire situation of America’s checkbook has made the debate over taxing and spending more relevant than ever, especially with a politically radical president in office at the same time that his party dominates both houses of Congress.  An examination of the financial conditions of two states that reside at different ends of the political spectrum should prove useful in further exploring the debate over fiscal policy.

California, which has one of the highest state tax rates and is one of the bluest states in the US, currently has a deficit of $26 billion, which is down from $42 billion in January 2009.  The top 1% of the income tax bracket in California accounts for nearly 50% of the state’s tax revenues.  It would seem that the more money a state collects in tax revenues, the more money it should have, preventing it from falling into such a large deficit.  However, with the territory of taxing more comes the idea that the state should spend more, controlling more spheres of its citizens’ lives and enlarging the size of government itself.  When the people of the state do well financially, the state will collect more money, especially one such as California that taxes its wealthy so much more than the rest of its citizens.  This inevitably leads to increased spending by the state.  However, when the economy of the state slows down, as California’s economy inevitable has since the financial crisis, the tax revenues that the state has come to depend on decline sharply, but it is extremely hard for politicians to scale back on the amount of money the state spends.  This leaves the state in a large deficit, and not surprisingly, its unemployment has jumped over 12%.  Admittedly, all of California’s problems do not stem from its liberal tax and spend policies, but this philosophy of government has contributed significantly to the deficit the state now finds itself in. 

On the opposite end on the political spectrum is Texas, a state with no income tax and as of January 2009, Texas was one of six states without a budget deficit.  While a state such as California may provide more services to its citizens, the inherent flaws in bureaucracy often cripple the effectiveness of such services, and most of them can be provided by sources other than the government.  However, Texas’s relative financial strength has allowed its residents to live their lives less hampered by the financial crisis than most residents of the United States.  This is undoubtedly a great service that the state has offered: minimizing the financial hardships for its citizens by properly managing its own finances.  Texas has allowed its residents to continue their normal lives, with an unemployment rate just over 8%, while many Americans have lost their jobs and homes during the recent financial crisis.

The comparison between California and Texas serves to illustrate the different effects that varying philosophies on taxing and spending have on state economies.  It seems that Texas’s lack of an income tax has played a role in its financial strength relative to other states.  Furthermore, the seven states in the US that lack income taxes are all doing well financially relative to the rest of the country.  Perhaps their lack of an income tax is a result of their financial stability rather than a cause, but it seems that however large a role, the lack of an income tax has helped these states stay relatively strong throughout the financial crisis.  This could be troubling news for the country, as President Obama looks to handle the financial crisis with more taxation and spending, which could explain the president’s projected $9 trillion deficit.

This entry was posted in Articles for Volume 3, Issue 1, Fall 2009. Bookmark the permalink.

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