For Immediate Release: June 26, 2001

California's High Tax Rate Driving Away Businesses and Consumers

San Francisco, CA – While the California legislature debates whether to reinstate a quarter-cent sales tax, a Pacific Research Institute (PRI) report shows that sales taxes are destroying jobs, making life more difficult for the poor, and driving away employers, entrepreneurs, and citizens. According to "Tax Relief for California," by Erik Bauman, PRI fellow in California tax studies, the quarter-cent sales tax cut that was enacted last year allowed California to gain almost 85,000 new jobs. If the sales tax cut remains in place, California can expect to see the creation of a total of 150,000 jobs by 2004. If the legislature chooses instead to raise the sales tax by a quarter-cent, California will lose most of these job gains.

"The legislature should understand that for every $2,800 in sales taxes they collect, they are destroying a California job," said Bauman. "Is it really worth the trade off?"

California's sales tax was reduced from 6 percent to 5.75 percent as a result of California's booming economy, but with the economic downturn, some California lawmakers are now pushing to reinstate the quarter-cent tax. Fiscal conservatives argue that the reduced sales tax is necessary to help stimulate the economy.

According to the report, the net gains that the quarter-cent sales tax increase would bring are "miniscule" when compared to the overall state budget, and preclude the significant revenues that the state will gain through long-term job growth. If the state made the sales tax increase permanent, it could expect a net revenue loss of about $600 million for calendar year 2001, dropping to only $420 million by 2004 – which would represent only about four-tenths of one percent of the state budget that year.

California's Taxes are Among the Highest in the Nation

The Institute reports that California's taxes are already among the highest in the nation. At 9.3 percent, the state's top personal income tax rate is the 5th highest in the nation, compared to a national average top rate of 5.6 percent. The flat corporate tax rate of 8.84 percent is the 11th highest of top tax rates; the national average of top corporate tax rates is 6.65 percent. There are nine states that do not have personal income taxes, and six states that do not have corporate income taxes.

"Running California is like running a competitive business," said Bauman. "If the legislature doesn't make the economic environment competitive for businesses, entrepreneurs, and citizens, there are 49 other states that can offer them a better deal."

The PRI report is based on the Institute's California State Tax Analysis Modeling Project (Cal-STAMP), an economic model designed by the Beacon Hill Institute at Suffolk University.

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The Pacific Research Institute for Public Policy is a non-profit organization dedicated to the promotion of the principles of individual freedom and personal responsibility. The Institute believes these principles are best encouraged through policies that emphasize a free economy, private initiative, and limited government. By focusing on public policy issues such as health care, welfare, education, and the environment, the Institute strives to foster a better understanding of the principles of a free society among leaders in government, academia, the media, and the business community.