In what is becoming a perennial affair, the California budget deficit is projected to be over $21 billion in the coming year – including a $6 billion hangover from this year. With the same degree of regularity, in pursuit of stable education funding (a good idea), educators in California are calling for tax rate increases (a bad idea) and blaming Republican legislators for blocking those increases (an unproductive idea). Rather than call for more tax rate increases – one of the causes of our current problems –educators should call for policies that will increase private sector jobs so we have more people paying taxes – not less.
At first blush, it may be hard to believe that we have another deficit. After all, in 2008, expenditures were far in excess of $100 billion. Expenditures for the upcoming fiscal year were just over $90 billion. With all that cutting, shouldn’t we have a balanced budget? The answer is no – because budgets are a two-part equation: deficit/surplus = spending – revenues. In California’s case, revenues have plummeted faster than expenditures – and continue to do so at a perilous rate. Worse yet, California’s Legislative Analysts Office projects huge deficits for years to come.
Nevertheless, Democrats and many educators are calling for ever more tax rate increases in a dangerous game of economic roulette with California jobs. Keep in mind that California already has the 6th highest tax rate in the Country. Why not shoot for number #1? Three reasons:
The states around us have much lower rates and our jobs are moving to those states (CA ranks 33rd in the nation in job growth over the last 5 years – Nevada ranks #1 in new business development*).
The comparable states with higher tax burdens all have big deficits as well, i.e. New York and New Jersey, so obviously higher tax rates are not a magic wand for budgets.
Even if the State confiscated all of the income of all of the higher income people in California, in any one year, it would not close the current budget gap – not to mention (1) those people would flee this state with more reckless abandon than they are now (net loss of over 1 million people in the last 5 years) thereby making the one-time confiscation a dumb move and (2) that wouldn’t solve our long term deficit problems. Keep in mind that 50% of all of California’s income taxes are paid by just 150,000 Californians. If you chase them off, then who will you vilify with higher tax rates?
California’s real problems are (1) the national economy, (2) that so many Californians have left over the last 5 years and (3) millions of Californians are now unemployed. All together that means a shrinking taxpayer base, i.e. businesses and people are paying less income taxes (or none at all), they are not buying as much and, consequentially, they are not paying as much sales tax which results in less income for others and on and on.
Now, granted, California cannot stop the Obama Administration from harming the national economy even more in the form of higher taxes and regulations which will kill off even more investments and jobs. Remember that if the government takes money from investors and consumers, they are not buying as much and therefore not paying as much sales tax which results in less income for others and on and on.
Regardless of what Washington does to California, however, California still represents 13% of the nation’s overall economy. And notwithstanding all of its unparalleled blessings of coast lines, ports and natural resources, California has ranked a pathetic 24th in the nation in economic growth over the last 5 years.* That is almost entirely California’s own fault – not Washington’s. A vibrant California economy, on the other hand, would help foster a national turn around.
More to the point, the principal way to grow California revenues, and thereby ease our budget crisis, (in addition to capping spending year to year), is to widen our economic/tax base, i.e. grow our economy by allowing employers to succeed in California and, in turn, hire more employees. The formula for doing that is pretty easy because jobs are subject to the laws of economics too. The less they cost the more of them we will have. The same holds true for employers. The more it costs to do business in this state – especially in comparison to Arizona, Nevada and Oregon – the less businesses we will have.
At this point it shouldn’t take an advanced to degree to know that if businesses and jobs are fleeing our state, along with taxpayers, we need to lower the costs of doing business here, i.e. taxes and regulatory costs. In doing so, we will create a broader based economy, with more employers (paying corporate taxes) with more employees (paying income taxes and sales taxes).
That is the path to an A+ economy not the failed measures of the past of demanding higher taxes from an ever shrinking base. In stark terms, the very minimal purpose of education should be to learn from our mistakes of the past. If so, then it should be simple enough to learn, as the liberal economist John Maynard Keynes taught us, that high taxation defeats its very purpose. Our failing economy and falling revenues are exhibit one to that lesson. In the New Year, let’s hope our politicians and educators can appreciate that old economic lesson from decades ago.
Data from the Pacific Research Institute