Arthur B. Laffer: Right to work, wrong to tax in California

Arthur B. Laffer: Right to work, wrong to tax in California

Gov. Jerry Brown just enacted a $91.3 billion budget measure to close California’s $16 billion deficit. After pleading with legislators to approve billions of dollars in spending cuts, he’s asking voters to approve major tax increases in November. If they don’t, some $6 billion in cuts would take effect in January.

California’s voters shouldn’t have to clean up the fiscal mess lawmakers created. Over a period of decades, legislators have created a tax and regulatory climate hostile to business — and all but guaranteed that the Golden State will not be the sort of place where productive and growing companies set up shop.

You can’t balance the budget on the backs of the unemployed. If California is to avoid yearly budget crises, it must attract and retain prosperous businesses that create jobs and, of course, pay taxes. Two of the most reliable ways of doing so are drastically reducing the corporate income tax and adopting a right-to-work law.

At 8.84 percent, California’s corporate tax rate is the highest in the West. Only eight states have higher rates. It’s not surprising, then, that the state’s economy is suffering from a stubbornly high 11 percent unemployment rate. California’s economy isn’t growing so much as plodding: Its growth rate last year was a sad 34th in the nation.

By contrast, the states with the lowest corporate tax rates enjoy the highest rates of growth. Look at Nevada, a state with a top corporate tax rate of zero. Between 2001 and 2010, Nevada’s gross state product (GSP) grew 58.9 percent. During that time, the nine states with the lowest corporate income tax rates saw GSP growth rates 14.9 percentage points higher than the nine states with the highest rates. Payroll employment in those nine low-tax states grew by 4.86 percent. Employment declined 1.63 percent in the high-tax states.

So in a decade including the most severe economic crisis since the Great Depression, low-tax states created jobs while high tax states lost them.

Raising the revenue necessary to plug a budget deficit by cutting corporate taxes may seem counterintuitive. But tax revenue grew 16 percentage points more in states with the lowest corporate income rates than in states with the highest.

Low taxes aren’t the only way to attract and retain businesses. Implementing a right-to-work law, which prohibits workers from being fired for not paying union dues, is another way to guarantee outsize economic growth.

Right-to-work laws provide individual workers with greater freedom to negotiate the terms of their employment, and they create an environment where companies can avoid obstructive union rules. Between 2001 and 2010, gross state product in the 22 right-to-work states grew nearly 53 percent. States with forced unionism posted growth rates 11 percentage points lower. Incomes increased by nearly 50 percent in right-to-work states — 11 percentage points more than in those without such laws. Employment grew by 2.8 percent in the chosen 22 while it declined by 1.29 percent elsewhere.

States combining zero percent earned income tax rates and right-to-work laws have performed best of all. Of the nine states without a personal income tax, the economies of the six that are also right-to-work have grown nearly 8 percentage points faster than their forced-unionization counterparts.

California’s economic malaise isn’t the result of a lack of ingenuity or entrepreneurial spirit but of shortsighted policymaking. The good news is that the same lawmakers that have been holding the Golden State back can fix it by implementing these tried-and-true reforms.

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Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.