Gov. Jerry Brown’s fiscal 2011-12 budget aims to close the state’s projected $26.4 billion deficit with a combination of tax measures and targeted spending cuts. While a welcome change from gimmicks that only defer the problem, the budget ignores long-term competitiveness problems that plague the Golden State.
Gov. Brown proposes to extend for five more years the increases in personal income taxes (surcharges) and the sales tax implemented in 2009. These proposals, along with a series of smaller but important changes, are expected to bring in an additional $12 billion over the next 18 months.
He also proposed spending cuts of $12.5 billion, including reductions in Health and Human Services ($5.8 billion), higher education ($1.8 billion), and the legislative, judiciary, and executive branch ($660 million). The largest portfolio of general fund spending, K-12 education, sees a modest 0.4 percent reduction in spending, representing $142 million.
This plan only closes the current budget deficit if spending is reduced, if tax revenue rebounds, and if the U.S. economy improves as forecast. Importantly, the plan assumes a decent rebound in the state economy, not at all certain given current conditions.
A strong and growing economy is the foundation of a sustainable balanced budget and the ability to provide public services. The governor’s budget, unfortunately, is largely silent about competitiveness and how the state will return to lasting economic prosperity. Put differently, simply balancing the state’s financial affairs does not guarantee a return to economic prosperity.
Gov. Brown, thankfully, has avoided increasing tax rates by basically extending the current “temporary” rate hikes. California’s existing tax rates, however, are simply not competitive with other states, particularly our competitors.
At 10.55 percent, our top personal income-tax rate is the third-highest in the country. Even our second top personal income tax rate (9.55 percent) is higher than the highest rate in all but three other states. Utah’s flat rate of 5 percent and Arizona’s top rate of 4.54 percent are basically half our rates, and Washington and Nevada have no personal income taxes. Florida and Texas, which are often compared with California, also levy no personal income taxes.
Our corporate income tax rate (8.84 percent) is the eighth-highest. All neighboring states have lower corporate income tax rates, and Washington and Nevada impose no corporate income tax. Texas also has no corporate income tax and Florida’s is 5.5 percent.
California also continues to impose the highest state and local sales tax in the country. One-third of the revenue from the sales tax come from businesses, which means it’s not actually a tax on sales but rather a tax on business investment, which makes such activities less profitable.
The state’s lack of competitiveness extends beyond taxes. California’s regulatory burden has consistently been identified by businesses as a barrier to investment and expansion.
All this matters because taxes and regulations influence our decisions to work, save, invest, and be entrepreneurial. By making these productive and much-needed activities less attractive in California, we get less of them.
Gov. Brown should be applauded for suggesting spending reductions and generally attempting to hold the line on tax increases, but Californians should recognize the narrow focus of his budget proposal. This budget is really a first step in a much larger process. If California is to recapture its leadership role and return to economic prosperity, then taxes and regulations will have to be lowered to competitive levels and our tax system reformed to achieve efficiency and reduce compliance costs.
In other words, regaining a competitive edge, beyond our wonderful climate, based on sound tax and regulatory policies is the key to long-term prosperity in the Golden State.