The Texas magnet By Scott Sumner

Two years ago, the New Orleans Pelicans NBA team seemed to have a bright future:

The Pelicans, the team that had just hired Gentry as head coach, played the Warriors closer than their four-game, first-round sweep that season would suggest. New Orleans also had the franchise building block in Davis that nearly every organization lusted over and an odd, yet intriguing, mix of complementary pieces. . . . That team is long gone. Jrue Holiday, Tyreke Evans and Quincy Pondexter have had their careers marred by injuries and other hardships since that playoff series. Ryan Anderson and Eric Gordon fled for Houston the moment they hit free agency last summer. And, the shell of what remains has been cracked by the Pelicans’ inability to ever be whole, placing a greater weight on Davis’ shoulders that can’t be masked by those T-shirts he wears underneath his uniform.

For New Orleans residents, the loss of key players to Houston must lead to a bitter sense of deja vu. Back in 1950, New Orleans (pop. 570,445) and Houston (pop. 596,163) were roughly equal size cities, vying for the title of oil capital of America. Today Houston has 2.3 million people, nearly 6 times New Orleans’ population.

Some people attribute Texas’s success to oil, but Louisiana also has extraordinarily rich oilfields, onshore and off:

It’s not news that oil and gas companies are moving from New Orleans to Houston. It’s a trend that started in the 1980s with the downturn of the oil and gas business At the time, “New Orleans was really an oil center, certainly way more so than it was today,” Bennett said. In the late 1970s and 1980s, oil executives in New Orleans met for business lunches at Galatoire’s, Brennan’s or Kolb’s and sealed deals over drinks at the Petroleum Club, Briggs said. Even then, though, Houston had an edge on New Orleans because it had a more business-friendly environment and a better public school system. “Houston was just a better market to operate and live,” Bennett said. . . . Even though many of the energy companies still have a majority of wells, shipyards and employees in Louisiana or off the state’s coast, companies increasingly have concentrated their business activity in Houston. Over the years the New Orleans energy sector has suffered blow after blow. The most recent prior to Katrina was Exxon Mobil’s 2003 move to Houston. At that time, there was still optimistic talk about luring oil companies back to the city and the state. Later that year, the City Energy Club, the successor to the Petroleum Club, ceased to exist. “It’s a sign of the times (when) you don’t even have a Petroleum Club,” Parker said.

Louisiana is increasingly like a third world country, whose rich resources are exploited by the sophisticated technology of Houston companies.

It didn’t have to happen that way. The key seems to have been Houston’s superior economic model. No zoning laws, no state income tax, and much less corruption than in Louisiana. New Orleans residents pay a 6% state income tax on incomes above $50,000.

You might think it’s just a coincidence that the Pelicans lost two key players to the Houston Rockets. But for years the dirty little secret in the NBA is that teams in zero income tax states like Texas and Florida have an advantage in attracting NBA stars. Before-tax salaries are fairly similar because of the NBA salary limits, but after tax incomes are higher in Houston than New Orleans.

This was also an issue for oil companies:

Before deciding whether to return to New Orleans, Energy Partners Ltd. took a look at the economic advantages and disadvantages of staying in New Orleans. It boiled down to one thing, said Phil Zanco, director of tax at Energy Partners. “In a nutshell, if you want to get to the gist of the matter, Texas does not have a personal income tax,” he said. And the entrepreneurs and executives who are making decisions about where to build businesses pay a hefty portion of state income taxes, he said.

I don’t want to overplay the tax angle in the oil industry. Once Houston gained its advantage, there are big benefits of agglomeration. Oil companies want to be where the talent is, just and financial companies wish to be in Manhattan and tech companies in Silicon Valley (both high tax areas.) So there’s more involved than taxes. New York and California offer other important amenities. But seemingly slight differences in business environment can have a dramatic effect over time. Once a city takes over leadership in an industry, other top players want to be there:

Many executives talk about the “deal flow” in Houston, where prospects are traded at lunch and customers are picked up during casual conversations. Briggs, of the oil and gas association, likens it to the financial activity and camaraderie of Wall Street. David Heikkinen, who opened an office of the financial firm Pickering Energy Partners in New Orleans after Hurricane Katrina, agrees. “The gravity pulls you in. Most of the business and most of the people in the energy industry are here, and if you’re trying to build a business it’s where you want to be,” he said.

There’s a lot recent talk about how talent from the center of America flows to wealthy cities on the two coasts, where the opportunities for highly talented people are greatest. Another version of that brain drain is occurring in south central America, where Texas is like a magnet, drawing talent from many other states in the center of the country. It’s a different model from Wall Street and Silicon Valley, but equally effective.

When I first moved to Boston in 1982 the quality of life in Boston was not much different from in Nashua, New Hampshire. At the time, New Hampshire drew lots of residents north from “Taxachusetts”. Today Boston is a far more exciting place to live than New Hampshire, and the Granite State is now growing more slowly than Massachusetts. My theory is that in information oriented industries, state income tax rates are not a big factor. But in the more competitive goods industries in much of middle America, a lack of state income tax allows states like Texas, Tennessee, Washington and even South Dakota to do noticeably better than their neighbors.

PS. Merry Christmas to all my Christian readers and Happy New Year to everyone. Blogging will be spotty over the holidays.