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Life in the Underground
Capital Ideas
By: K. Lloyd Billingsley
1.23.2003
SACRAMENTO, CA - Those looking for ways to fix California's budget deficit of nearly $35 billion have made a startling discovery. The state's underground economy is thriving, to the tune of $60-140 billion per year according to one study. That is a lot of money and one can understand why state bagmen want to get their hands on it. But first they ought to ask why the underground economy grew to such proportions.
Some of it has to do with illegal immigration, to be sure, but there is more. The underground economy is a response to high taxes and onerous regulations, which abound in California. The Golden State, which may soon lose any claim to such a title, has one of the highest rates of income tax, at nearly 10 percent, and one of the highest sales taxes, at nearly eight percent. California deploys no fewer that three tax agencies. The Franchise Tax Board grabs income tax. The Employment Development Department, which does not develop employment, collects employer taxes. The Board of Equalization, which does not equalize anything, collects sales taxes. During the mid-1990s this agency attempted to tax editorial cartoons as though they were works of art purchased at a gallery.
California has made workers compensation more expensive and changed the rules on overtime from more than 40 hours in one week to more than eight hours in one day. These measures make it more expensive to conduct business and also reduce flexibility. Companies are now required to provide employees with paid leave. The state's regulatory regime has led to California's reputation as a bad place to do business, resulting in an exodus of industries to other states and a thriving underground economy.
The state's response to this multi-billion dollar economy is to crack down, as it did during the Wilson Administration. The nature of cash business, however, makes enforcement difficult. With their totalitarian governments, secret police forces, and armies of informers, the socialist regimes of the Eastern Bloc were unable to quash the underground economy, which in some cases they left alone because it provided much of the food.
With enforcement possibilities limited, legislators should seek to bring the underground economy above ground. That will require a change of incentives. Legislators should reduce taxes, fees, and regulations, and make it easier, not more difficult, to start and conduct business in this state.
Adding new taxes and regulations will only increase the size of the underground economy. A tax on the Internet, which some legislators would like to see, would not help. But increasing taxes seems to be the direction the legislature is taking. Long Beach Democrat Jenny Oropeza, chairwoman of the Assembly Budget Committee, has formed the "Working Group on Revenue," a secretive squad dominated by anti-business ideologues. This group works to wring even more money out of an overtaxed populace.
News reports on the underground economy have noted that immigrants who work for cash often come from countries where distrust of government runs high. With Sacramento politicians transforming fat surpluses into fathomless deficits, followed by an inept response, Californians have good reason to share that distrust. In coming days more of them will be joining the underground economy or heading to another state.
K. Lloyd Billingsley is editorial director of the Pacific Research Institute in San Francisco. He can be reached via email at klbillingsley@pacificresearch.org.
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