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Texas Touts Lighter Regulations in Wooing California Firms

Gov. Rick Perry often touts the state's "smart regulations" to businesses from California. While entrepreneurs in Texas often find fewer regulatory obstacles, some argue the Texas approach has hidden costs that aren’t worth the sacrifice.

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Monday’s news that Toyota is moving 3,000 jobs from California to Texas is drawing fresh attention to the competing business climates of the two states.

Gov. Rick Perry has waged a lengthy campaign for California businesses to move to Texas. Along with predicting California businesses will see reduced tax bills in Texas, he often touts his state’s lighter touch when it comes to regulating businesses.

“While California regulates,” his office tweeted last year, “Texas innovates.”

A closer look at the two states’ approaches to some key regulations reveals major differences that increase costs for California businesses compared with their Texas counterparts. Entrepreneurs in Texas often find fewer obstacles to developing land or energy resources and lower labor costs than they would in California.

But some argue that the Texas approach has hidden costs that simply aren’t worth the sacrifice, such as lower wages for workers at the bottom of the economic ladder and less stringent protections of the environment. Supporters of the Texas approach counter that it’s not Texas regulations that are too lenient but California regulations that are onerous.

“We like to think Texas is not so much light in its regulatory impact as it is just more rational and reasonable,” said Steve Minick, vice president of government affairs at the Texas Association of Business. “There’s a reason people are leaving California and why they’re not enjoying the growth that other states are enjoying.”

In California, politicians have been pushing for years to streamline the state’s regulatory framework. Democratic Gov. Jerry Brown has mentioned it in three of his last four annual State of the State addresses.

“Our approach needs to be based more on consistent standards that provide greater certainty and cut needless delays,” Brown said in 2013.

Among the regulatory obstacles Brown has sought to ease is California’s restrictive approach to land development, which experts say has led to a shortage of housing options and sky-high costs.

Jordan Levine, director of economic research with Beacon Economics, a Los Angeles-based research firm, called the cost of housing “the biggest threat to California’s economy,” and said the state’s most affordable market is “on par with the most expensive market in Texas.”

Levine said California suffers from a “chronic undersupply of housing,” which he blamed in part on how difficult the state makes it for new construction projects to move forward. Developing land in Texas is widely viewed to be easier.

Between 2000 and 2010, the number of housing units in Texas rose 22 percent, compared with 12 percent in California, according to a recent study by Ali Anari, a research economist with the Texas A&M Real Estate Center.     

“The supply side of the Texas housing market succeeded in meeting the growing demand for homes while retaining affordable prices by developing and supplying more low-cost land for housing developments,” Anari wrote. “The housing supply-side flexibility was absent in California.”

Brook Taylor with the California Governor's Office of Business and Economic Development said many complaints about the state’s land development policies revolve around the California Environmental Quality Act. Brown recently signed a bill to make complying with that law less difficult, he said.

“In the past, CEQA has been unfortunately used to slow down development,” Taylor said. “The governor is well aware of that, which is why the state has been taking steps to streamline that process and make it faster.”

At the same time, Texas draws its own criticism: that state and local entities make it too easy for new housing developments and other projects to get built, encouraging development farther away from urban centers.

The accelerating sprawl doesn’t just exacerbate traffic congestion and air pollution, said Stephen Klineberg, co-director of the Kinder Institute for Urban Research at Rice University. It also boosts an area’s cost of living, which could deter economic growth over time.

“The great advantage Texas has had of being the cheapest place in America to live is disappearing rapidly around cities,” Klineberg said. “When you factor in the cost of transportation, you are much better off living closer in than driving the two hours every day.”

California has drawn attention for its environmental regulations well beyond the difficulty of building new homes. The state has implemented among the toughest rules aimed at minimizing the impact of California businesses on climate change and air pollution. Critics have charged that the regulations have cost the state billions of dollars in economic development.

In September, Brown drew the ire of environmentalists by signing into law a bill setting up regulations for energy companies to start using hydraulic fracturing to develop California’s oil reserves. The shift comes nearly a decade after private firms began using fracking to develop shale plays across Texas.

Texas’ more freewheeling energy policy has critics, too — environmentalists who argue that the state’s existing regulations lack teeth.

“In Texas, very few violations result in a fine, and if they do result in a fine, the fines are often very low and the economic benefit to violate the law is often greater than the punishment,” said Luke Metzger, director of the group Environment Texas. “It creates a perverse incentive to violate the law.”

But Minick, with the Texas Association of Business, said he hears more complaints from California businesses about that state’s environmental regulations than any other issue.

“I think penalties in Texas that are levied for violations can be very onerous,” Minick said. “But on the front end, when starting a business or making modifications to your business or complying with new regulations as they come along, I think the agencies in Texas have a more practical point of view.”

One of the starkest regulatory gaps between Texas and California exists in workforce, where differences in labor costs and productivity can help determine where businesses set up shop.

In September, California lawmakers approved a state minimum wage that will grow to $10 an hour in 2016, making it the highest state minimum wage in the country. California’s current $8 minimum wage is already among the nation’s most generous. Texas is one of 21 states that follow the federal minimum wage, currently set at $7.25 an hour.

Texas is also the only state in the country where the decision to carry workers' compensation insurance or a private equivalent is voluntary for companies of any size. In California, companies with even one employee are required to have workers' compensation insurance.

The divide in the two states’ labor regulations can also be seen in the impact of unions. Texas is among 24 states with “right-to-work” laws that prevent unions from making union membership or the payment of dues mandatory as a condition of employment. Texas has among the lowest unionization rates in the country, at 5.7 percent as of 2012, according to Bureau of Labor Statistics data. Compare that with California, where 17.2 percent of workers belong to unions, among the highest rates in the country.

“Our right-to-work laws are critically important, particularly when it comes to recruiting companies from the northeast,” state Rep. Jim Murphy, R-Houston, the chairman of a House subcommittee focused on manufacturing, said earlier this year at a panel discussion focused on economic development.

Research has found that wages are lower on average in states with right-to-work policies, even though job growth in those states has been better in some cases. Timothy Bartik, a senior economist with the Upjohn Institute for Employment Research in Michigan, said the strategy a state employs “depends on what you think the goal of economic development is.”

One of the few areas where Texas has frequently drawn criticism for being overly aggressive on regulations is occupational licensing.

In a 2012 study, the Arlington, Va.-based Institute for Justice, a law firm that has filed suit against what it believes are unfair licensing requirements, found fault with both Texas and California. Though California requires licensing of more businesses and is generally more onerous, only Texas requires hair braiders, eyebrow threaders and auctioneers to pay licensing fees and meet training requirements — rules that opponents say have little value and impede employment. The Texas Supreme Court in February heard a case challenging the need for state regulations for eyebrow threading.

“What we see is licensing leads to less economic freedom, fewer choices and higher costs,” said Brent Connett with the Texas Conservative Coalition. His group and others have fought to repeal the state’s occupational licensing rules for professions in which the public’s safety or welfare is not directly at risk. He praised a bill from the 2013 legislative session that ended the state’s licensing for ringside timekeepers in combative sports events. The program had licensed fewer than 50 people and had never received any complaints, according to state records.

Texas lawmakers lowered the licensing fees for several occupations last year. Yet they also decided that architects must submit to fingerprinting as part of getting or renewing a state license, making Texas the only state to implement such a requirement. The Texas Society of Architects argued that the new rule was heavy-handed and unnecessary, but supporters countered that it would aid in state criminal background checks of architects.

Taylor, with the California governor’s office, said his state recently rid itself of an occupational regulation that had become redundant. For decades, California had performed its own permitting and inspection of drug and medical device facilities. The practice was widely criticized as unnecessary given that the U.S. Food and Drug Administration also regulates those companies.

“That was another example of the state having an unnecessary level of bureaucracy that the governor eliminated,” Taylor said.

Despite recent efforts by California to ease its regulations, the state remains a frequent punching bag for Texas lawmakers and business leaders. Yet Levine, with Beacon Economics, argued that each state has strengths and weaknesses that make efforts to compare them misleading.

“The structures of our economies are so different,” he said.  “I think both California and Texas remain two economic success stories over the long term.”

Disclosure: The Texas Association of Business, Texas A&M University and Rice University are corporate sponsors of The Texas Tribune. A complete list of Texas Tribune donors and sponsors can be viewed here.

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