Jul 23, 2018

Texas Has a Great Business Climate, but Not When It Comes to Regulation

James Broughel Senior Research Fellow

Earlier this month, CNBC released its annual ranking of “America’s Top States for Business.” Texas came in as the number one state in the country for business, up from number four last year. The state’s strong economy, modern infrastructure, and innovative workforce all contributed to its top placement. It sounds like Texas businesses are doing great, but there is one area where Texas can still do much better—regulation.

The headline numbers in the CNBC rankings don’t tell the whole story. When it comes to the cost of doing business and overall business friendliness, Texas ranked 18th and 21st, respectively. CNBC credited the state’s mediocre performance on business friendliness to a “sometimes difficult legal climate”—which sounds like short-hand for regulation.

A few months ago, I released a report for the Mercatus Center assessing the regulatory environment in Texas.  My coauthor and I found that the Texas Administrative Code contains 226,898 instances of the terms “shall,” “must,” “may not,” “prohibited” and “required.” That’s the fourth highest among the 25 state codes we’ve reviewed so far.

That’s a lot of regulation, and it explains why Texas, despite being number one for business overall, still has a lot of room for improvement.

Texas may be able to learn from another top performer in the CNBC rankings—Virginia—which ranked number four overall. CNBC cited a bipartisan regulatory reform in the state as a key reason for the state’s leadership in business friendliness.  Virginia Governor Ralph Northam also credited the new reforms with helping Virginia rise in the rankings this year.

Virginia’s new law creates a state inventory of regulatory requirements—which should help policymakers track and control regulation levels in the future—and it sets an ambitious goal to reduce regulatory requirements by 25 percent at two state agencies that engage in a lot of occupational licensing regulation.

The biggest title of the Texas administrative code relates to economic regulation, with more than 33,000 of the restrictive terms just mentioned. This title is where you will find many of the state’s complicated licensing requirements.

These rules sometimes have a valid safety or public health purpose, but other times they just make it harder for people to find work by creating barriers in the form of expensive fees or training requirements. Licensing rules also contribute to criminal recidivism. By making it harder for ex-offenders to find jobs after leaving prison, it’s more likely they’ll commit crimes again. Texas ranked 31st in the CBNC rankings for quality of life, in large part because of the state’s high violent-crime rate.

Texas has been no slouch when it comes to regulatory reform. Last year, the state passed a law to repeal an old rule each time a new one is introduced. Texas has made progress on licensing reform as well. But if Texas wants to get serious about improving its “legal climate”, a more aggressive approach may be needed.

The Texas economy is strong and its workforce is among the best in the country. To unleash those industrious workers even further, the next item on the policy agenda should be addressing the state’s complex regulatory, err, I mean, legal climate.

Photo credit: Eric Gay/AP/Shutterstock

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