HERE is an intriguing question which says a lot about modern America but which everybody here in London always gets wrong. Which US state is home to most big companies? New York, surely, host to Goldman Sachs, News Corporation and Pfizer? Or could it be California, home of Apple, Intel and Walt Disney? Wrong, on both counts. The most important base for corporate America is now Texas, a state polite society in London looks down upon but which has undergone an astonishing economic expansion.
By last year, Texas was home to 64 of the Fortune 500 companies, compared with 56 for New York state and 51 for California; Texas grabbed the lead for the first time in 2008 and is home to such giants as AT&T, ExxonMobil and Dell. New York City itself still hosts more top firms – 43 – than any other individual city in the US – Houston, Texas, is second with 27 and Dallas, Texas, third with 14 – but even the mighty and wonderful Manhattan is far less dominant than it once was.
There is a vital lesson here for London and Britain: business and capital get tired of high-cost locations. One key reason for Texas’s growth is that its economy and jobs markets are much freer. Another is that Texas doesn’t impose a state personal income tax on top of the federal tax, while New York charges up to 8.97 per cent and California a maximum of 10.3 per cent. Texas’ state corporate tax is equivalent to five per cent, against well over seven per cent for New York and close to nine per cent for California (the system is complex). It gets worse: as the Tax Foundation points out, New York has long had one of highest combined state/local tax burdens, ranking first or second every year since 1977; it is now 11.7 per cent of income. Many people take London’s supremacy for granted – the City remains very powerful, we have great theatres, arts and restaurants, so why should we worry? The rise of Texas and the decline of New York shows why.
Demographic disaster always follows economic under-performance, another lesson for London. Research by Arthur Laffer and Stephen Moore for the American Legislative Exchange Council found that from 1998 to 2007 over 1,100 people relocated every single day from the nine highest income tax states (including California, New Jersey, New York and Ohio), while those states with no income tax (such as Florida, Nevada, New Hampshire and Texas) saw their populations, economies and growth rates boom. The no-income tax states created 89 per cent more jobs and had 32 per cent faster personal income growth than states with high tax. And in recent years, US states that hiked their top tax rates the most suffered the smallest increase in their number of wealthy taxpayers. In 2008, Maryland created a millionaire bracket subject to a 6.25 per cent tax targeting 3,000 taxpayers. Residents could face a combined local/state rate as high as 9.45 per cent on top of federal taxes. One year later, only 2,000 $1m or more tax returns were filed. A third of millionaire earners had vanished from the state. In part, this was due to the recession – but in many cases it was because people moved out to neighbouring low-tax Virginia.
Britain is not America. But it is time we stopped kidding ourselves: the evidence shows that businesses, high-skilled individuals and wealth moves to those parts of the world that are the most welcoming. We may wish to ignore reality – but Singapore, Qatar and Hong Kong certainly won’t.