The Financial State of Texas State - Research Paper Example

? The Financial of Texas Lecturer: Evidently, Texas is an economic powerhouse in the United States of America as it makes up 8 percent of the total U.S. GDP. The over $200 billion exports in a year, robust and diverse industries together with ­­the favorable tax policy promotes its economic growth. Finance is a major factor in the economic development of any entity. Over 400,000 personnel in the state of Texas are employed by its significant financial sector. For the last five years, the Lone Star State has had has more finance and insurance jobs than the states of California, Illinois, Florida, and Georgia. The outstanding leadership of Governor Rick Perry has promoted the growth of the Texas State and eventual recognition of the Texas model for economic development. The no income tax policy, minimal government interference, and maintaining fiscal discipline has promoted an increase in population and newly created jobs. Texas State has been so successful that Governor Perry has been flaunting the Texas economic benefits and openly luring businesses from California, Maryland and other states to “think Texas” and relocate to the Lone Star State. Introduction In the United States of America, Texas State is the second largest and has the second highest number of inhabitants out of all the 50 states.  (Hess and Sauter, 2013) observe that the 2012 US national economy grew, and Texas and California, some of its largest state economies grew more rapidly. California has the largest state economy, closely followed by Texas. According to the International Monetary Fund 2011 rankings, Texas has a GDP of $1.2 trillion, that is, 8 percent of the total U.S. GDP. It is further recorded that the 2012 Texan GDP went up by almost twice the 2.5% of the total U.S. GDP. To add to that, Riva (2012) points out that by GDP, Texas would be the 14th biggest world economy, almost corresponds to two Switzerlands, if it were its own country. As a major economy in the United States, the Texan economy grosses over $264.7 billion exports in a year ­­- the highest since 2002 - and the second-highest gross state product. Currently, Texas headquarters several top 50 companies on the Fortune 500 list. As compared to other states, it leads in the agriculture , space and biomedical sciences, computers and computer electronics, energy and petrochemical firms. The mining industry, the largest in the U.S. that consists of oil and gas extraction has energy firms such as ConocoPhillips, Exxon Mobil is based there. American Airlines is based in Fort Worth while Southwest Airlines is based in Dallas. The Lone Star state is the pillar of the U.S. Air Force and lots of others all over the world as it makes its own fighter jets and has massive quantities of weapons-grade plutonium near Amarillo. The NASA Johnson Space Center, an aerospace center, the Dallas Cowboys and the Houston Texans football teams, the Texas Rangers and the Houston Astros baseball teams and the Houston Rockets, the San Antonio Spurs, and the Dallas Mavericks basketball teams and the Dallas Stars hockey team are all based in Texas State.  Population growth and energy manufacture in Texas have increased the Texan GDP rate by 4.8%. In 2012, population grew by about 1.7% and the energy industry accounted for $123.3 billion of the nation's $285.2 billion output (Hess and Sauter, 2013). Just like Florida, Nevada, South Dakota and Washington, Texas is a no income tax state (Wood, 2013). Among the 50 states, Texas ranks relatively low in terms of tax burdens and taxation on consumption. Texas Governor Rick Perry has always been enticing Americans to relocate to Texas using the “no state income tax” tag line and pointing out the benefits of residing in the Lone Star State. The Texas’ economy is entirely diversified and not reliant on any one industry. As countless states are still tussling to develop their finances, Texas not only has all it needs for its critical roles, but also upholds a fiscally robust Rainy Day Fund. This, according to the American Legislative Exchange Council (ALEC), is because of the no state income tax policy and dislodging the government out of the private sector’s way to allow ample and grander financial growth (Laffer, Moore & Williams, 2013). On the other hand, Washington’s spending is out of control, tax burdens keep escalating and the current regulations do not support the growth and workforce of its industries. According to Governor Perry, the discretion and discipline in spending and taxation has contributed to Texas economic prosperity as compared to other states. Compared to the U.S. financial sector as a whole, the Texas financial services industry is considerably more specialized in sales funding, real estate loaning, and consumer investment than the financial sectors of most other states. In contrast, New York’s and Massachusetts’ financial industries are far more reliant on investment activities, such as investment banking and securities brokerage. Hence, the Texas financial services industry is almost indirectly tied to Wall Street undertakings. The banking sector is the principal financial sector in Texas, consisting of about 39% percent of all financial services employment. Though commercial banks dominate the sector, credit unions, and other savings and depository institutions also make up the financial sector. The Texas Department of Banking (DOB) directs the state’s banking industry while the Texas Credit Union Department (TCUD) regulates all Texas-chartered credit unions. Texas has a constantly increasing population and a fairly buoyant economy, the two ideals for a bank to be successful. Citigroup, Bank of America, JPMorgan Chase and Wells Fargo have an extensive presence all over Texas State. On the other hand, the conservation banking system has been in operation in California for the last 18 years.  Ecological values, site selection, credit determinations and legal issues to resolve are some of the complexities surrounding the conservation system of banking. Sometimes, it may take up to seven years for a bank to be approved in California. Between 2007 and 2012, California lost 17 percent of its financial sector workforce due to the poor performance. The Fish and Game Code passed in June of 2013 aims at setting up new guidelines and procedures around the practice of conservation banking. With this, the struggling California banking industry may be able to catch up and even compete with the Texas banking industry Since the start of 2008, (Ellis, 2009) notes that only four Texas banks have failed, and business has been good for banks operating within the Lone Star State. According to Sheshunoff & Co. Investment Bank report, Texas banks reported success that exceeded the rest of the country, producing a 0.69% return on assets, compared to the 0.49% national median. According to the Federal Reserve Bank of Dallas, the low unemployment rate, the rise in median home prices and sales activity and improved manufacturing activity helps many local banks avoid the hefty credit costs that have weighed down other states across the country. These dynamics, combined with a tough-but-fair state regulatory regime, have made Texas the optimal location for the banking industry such that the crowded playing field has not dissuaded various financiers from exploring this money-spinning market. In 2010, Site Selection Magazine ranked Texas as the most business-friendly state in the United States, in part because of the Texas Enterprise Fund of about three-billion-dollars. Though Texas embraces the potential of spick and span profit margins for banks, the declines in natural gas price and commercial real estate market worry some banks and are looming trouble spots for lenders considering enlarging their existence. The downfall of energy rates and drop in commercial real estate rates led to the failure of about 600 Texas banking institutions in the 1980s and early 1990s due to the. This led to various banks to take safety measures in their underwriting practices and regulating their exposure to the energy industry. A great portion of the credit and consumer lending services are headquartered in Texas State. The state’s limit restriction on home equity loans explains the relatively low rates in residential foreclosures (Laffer, Moore and Williams, 2012). In June of 2011, Gov. Rick Perry signed two bills to regulate the auto title lenders and over 3,000 payday in Texas. The bills established an accrediting and governing framework for short-term consumer loans, while bringing short of capping fees or loan amounts to an end, and conveyed the auto title lenders and state’s payday under the authority of the state’s Consumer Credit Commission, which controls the Texas’ credit industry. The bills have been operational since January 1, 2012. Less than 5% of the Texan financial sector makes up the Texas insurance sector. The Lone Star State is home to just about 860 insurance carriers, consisting of about 21% of all financial services workforces. This workforce size of Texas is the second largest in the country after California. The Texas workforce is more specialized in property and casualty carriers than in health and medical insurance carriers, that is, in comparison with other states. The Texas insurance industry is controlled by the Texas Department of Insurance (TDI). According to Adkisson (2013), Texas had been less welcoming to Texas captive insurance businesses. However, ensuing the IRS’s 2002 guidance which has favored the remarkable and astounding progress of the U.S. captive industry, the TDI bowed to the unescapable. TDI was allowed to authorize and systematize captive insurance companies in the Lone Star State in June of 2013 when Texas Governor Rick Perry signed up a law on the same. The Texas Insurance Commissioner, Eleanor Kitzman, rationally noted in her 2012 Biennial Report, that “An opportunity exists to further enhance Texas’ pro-business climate. Allowing the formation of Texas domestic captive insurance companies could help attract new businesses and retain existing Texas companies. In addition to touting the current benefits that Texas has to offer, Texas-based Fortune 500 and other corporations could benefit from reduced costs and administrative burdens related to their captive operations.” A noteworthy reason that Texas and other states have approved captive legislation is in an attempt to preserve the captive business and the revenues they generate within these states, and not mislay it to Vermont, Utah, or several other states that aggressively seek the captive insurance business. The State of Texas has also toiled to strengthen the health insurance business through legislation. The Texas Medical Malpractice and Tort Reform Act went into effect in September 2003, and according to the Texas Medical Association, this resulted in reductions in insurance premiums and a growth in the amount of insurance companies entering the Texas marketplace. Laffer, Moore and Williams (2012) list the USAA, Torchmark Corporation, American National Insurance, HCC Insurance Holdings and Stewart Information Services as some of the Fortune 1000 insurance carriers headquartered in the state of Texas. The NYSE Euronext, the Nasdaq and AMEX are the three main financial securities markets in the United States. In the Texas State, approximately 29% of all financial services firms are investment-related. Many of these investment firms are small enterprises because the sector accounts for only 9% of all financial services employment in the state. The financial securities sector in the Lone Star State comprises of securities brokerage, portfolio management, and investment advice (Hess & Sauter, 2013). The Texas Securities Act is controlled and enforced by the State Securities Board which embraces and occasionally updates guidelines that looks after investors and shuns irrational burdens on legal capital-raising activities. Fidelity, Charles Schwab, and Invesco, some of the leading investment companies in the world, uphold substantial corporate operations in Texas. The investment-related industry of Texas has been rapidly transformed by internet services that allow online trading. Regardless of the late 2000s global financial crisis, investment advising has continued to be an optimistic spot in the Texas financial sector, accumulating more than 3,300 jobs from 2005 to 2011, representing an advance of about 80%. Also from 2005 to 201, the amount of securities brokerage institutions has also grown by 103%, while employment in these institutions grew by 24%. California’s unpredictability in the tax code is harmful for investment and makes it challenging for business planning. The Texas commodities trading sector is focused primarily on oil and gas. In contrast to their colleagues in places like New York, Texas dealers are expected to deal in physically delivered commodities, such as crude oil. OTC Global and U.S. Energy Markets are some of the prominent energy trading businesses. The energy companies find fortune not only on the ground but also in the stock market. For instance, in 2011, stock markets had a rough year but the big stock front-runners in the S&P 500 included two fundamental companies in the natural gas business, Cabot Oil & Gas and El Paso both based in Texas (Krantz, 2011). According to the 2012 Texas Financial Services Industrial Report, the industry docket of financial undertakings minimally grew as compared to the general economy of the state. Laffer, (Moore and Williams, 2012) observe that the domestic equity standards keeping and the relative stability prices have shielded Texas State from high foreclosure rates which have troubled the real estate industry in other places in the nation. For instance, in August 2011, the Texas foreclosure rate appeared once in each one of the 958 mortgages, evidently an improvement as compared to the rest of the southwestern states like as Nevada’s single occurrence in 118, Arizona’s single occurrence in 248 and California’s single occurrence in 226. It is this proportional strong point that has boosted real estate business job creation in Texas, leasing and rental services also went up by 4.5%. Even though the real estate and finance divisions are somewhat strong, (Adkisson, 2013) records that flaws among insurance carriers and correlated insurance undertakings lead to loss of jobs in this area. The Texas Emerging Technology Fund (TETF), the Texas Enterprise Fund (TEF), Texas Economic Development Bank (TEDB) and training programs are some of the incentives in the Lone Star State. At the urging of Governor Perry, the TEFT was formed to research, development, and commercialization purposes. The TEF, described as the biggest “deal-closing” fund, supports various economic development projects such as expansion of infrastructure while the TEDB’s mission is to make available viable, profitable state incentives to increase businesses operating within the state and to those repositioning to Texas. Other programs include the Enterprise Zone, the Defense Economic Readjustment Zone Program, and the Federal Enterprise Zone / Renewal Community Program. These give various tax incentives and innovative solutions for business expansion and reposition to Texas. Matt Moore, South Carolina’s GOP chairman describes Governor Perry’s record on jobs and economic growth as robust and recommends that Washington, D.C. should emulate the Texas model for economic development. Lately, the Texas governor has been telling the Texas growth story - 40 percent of new jobs and contributed 8 percent of U.S. population growth - around the United States. He has attributed the Texas economic growth to low taxes and less regulation. (Jeffe and Jeffe, 2013) note that Governor Perry has been flaunting the Texas economic benefits and openly luring businesses from California and Maryland to “think Texas” and relocate to the Lone Star State. However, in an Iowa visit, Governor Rick Perry acknowledged the mutual features of balanced budgets and job creation of the two states. Despite the numerous alerts to Washington to adapt the Texas road map for the future, the Texas-California competition brings Texas’ vulnerabilities to the light. For instance, the claim that as per facts and figures, the Texas strategy gives preference to the affluent and leaves out the middle class. The relatively high property and sales taxes also seem to be a trade-off on the ‘no income tax’ policy. Texas, the Lone Star State, is a robust economic and political powerhouse in the United States. It leads in the best cities for decent jobs, has an auspicious business climate and moderate housing and living costs. The Texas economy has always been grounded on energy and agriculture but there has been considerable advancement in the manufacturing and service industries hence enticing businesses with lower remuneration rates, weak unions, a friendly regulatory climate and large fiscal incentives. The popping of the most recent energy bubble will test the ability of Texas to uphold its economic momentum and overcome the certain hindrances to growth (Jeffe. S & Jeffe. D, 2013). Infrastructure and environmental challenges widely deter further fiscal growth in Texas. The presence of the financial aspects such as banking, credit, insurance, lending, investment and financial transactions underscores the significance of the state of Texas as a major financial investment center. In America, states have always and will always contest for inhabitants, incomes, and businesses. Competition is the foundation of triumph and fiscal strength in this country. Texas’ formula for robust economic growth and continued prosperity is based upon these sound principles: allow residents to keep more of their money, limit government interference, and maintaining fiscal discipline. And as Gov. Perry puts it “it’s our state’s commitment to these conservative principles that propelled us into, and maintains us in, the national spotlight highlighting our robust and thriving economy”. References Adkisson, J. (2013, June 10). Texas Adopts Captive Insurance Legislation But Beware. Forbes. Retrieved December 1, 2013, from http://www.forbes.com/sites/jayadkisson/2013/06/10/texas-adopts-captive-insurance- legislation-but-beware/ Ellis, D. (2009, August 26). Don't mess with Texas banks. CNNMoney. Retrieved December 1, 2013, from http://money.cnn.com/2009/08/26/news/economy/banking_texas/ Hess, A. E., & Sauter, M. (2013, June 15). Top states with the fastest growing economies. USA Today. Retrieved December 1, 2013, from http://www.usatoday.com/story/money/business/2013/06/15/states-with-the-fastest- growing-economies/2416239/ Jeffe, S. B., & Jeffe, D. (2013, March 8). The Great Debate: California v. Texas in fight for the future. The Great Debate RSS. Retrieved December 1, 2013, from http://blogs.reuters.com/great-debate/2013/03/08/california-v-texas-in-fight-for-the- future/ Krantz, M. (2011, December 28). Natural gas firms among top stock winners of 2011. USATODAY.COM. Retrieved December 1, 2013, from http://usatoday30.usatoday.com/money/perfi/stocks/story/2011-12-28/top-stock- winners/52257228/1 Laffer, A. B., Moore, S., & Williams, J. (2012). Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index. Arlington: American Legislative Exchange Council Riva, A. (2012, November 14). What If Texas Really Were Its Own Country? International Business Times. Retrieved December 1, 2013, from http://www.ibtimes.com/what-if- texas-really-were-its-own-country-880112 Wood, R. (2013, September 13). Everything's Big In Texas But Taxes---Online Tool Compares Yours State-By-State. Forbes. Retrieved December 1, 2013, from http://www.forbes.com/sites/robertwood/2013/09/13/everythings-big-in-texas-but-taxes- online-tool-compares-yours-state-by-state/ Read More