News reports indicate that Texas is negotiating a deal with Amazon.com that would defer for 4.5 years the collection of sales tax on Texas residents’ Amazon purchases, in return for Amazon’s promise to invest $300 million and create 5,000 new jobs in the state over the next three years.
While the Texas Public Policy Foundation was critical of recent legislation that would have taxed Amazon’s sales to Texas residents (see here, here, and here), we do not think that deferring the tax for 4.5 years is a good idea. We believe the best deal for Texas — and for Texans — is to not impose the tax at all.
There are two schools of thought when it comes to economic development. One — let’s call it the old-school approach — is focused on subsidizing businesses using taxpayers’ money. This approach relies fundamentally on grants, loans, tax abatements, economic development sales tax funds, and the like to lure business into coming to or staying in a particular location.
The other approach — let’s call it the free-market school — seeks to bring and keep businesses in a state by providing the best economic climate for people to live, work, and do business. It keeps taxes low, keeps regulations at a minimum, and generally tries to keep government out of people’s lives unless it belongs there. You might also call this the Texas model.
Lately, Texas has been the hands-down winner in the economic-development contest. Since June 2009, when the recession ended, Texas has added 265,300 net jobs, accounting for 45 percent of net U.S. job creation. Over the last ten years, the numbers are even better: Texas created more than 1 million jobs during this period, more than all other states combined; California, New York, Florida, and Illinois combined saw 930,000 jobs lost.
While it is true Texas has established some programs along the lines of the old-school approach, to compete with states spending taxpayer cash, the Lone Star State has largely built its success on the free-market model. Consider this: According to the Commonwealth Foundation, Texas ranks 37th in the nation in per capita spending on economic development. But Texas ranks 50th among the states in state tax burden, compared with California at 9, New York at 11, Florida at 36, and Illinois at 25.
Low-tax states have remarkable advantages over high-tax states in employment growth, income growth, and gross domestic product growth. Low-tax states also have a strong advantage in net domestic in-migration as a percent of population — people come to Texas because there are jobs here that they can’t find in their home states. This helps explain why Texas and New York have almost identical unemployment rates: Folks who couldn’t find jobs in New York have moved to Texas to work. Texas is keeping the entire nation employed.
A state that keeps its taxes low and overregulation at bay is one that fosters economic development. On the other hand, a state that plows its cash into economic-development programs and government spending is one whose businesses and citizens will soon be leaving for greener pastures.
Texas shouldn’t cut a deal with Amazon. It shouldn’t collect the tax at all. More jobs and investment will come to Texas without the tax than through the deal. And Texans won’t be burdened with increased taxes in four and a half years. After all, a tax increase is a tax increase, no matter how it is put off.