Cut taxes to boost employment – Pacific Research Institute

Cut taxes to boost employment

California’s unemployment rate, according to the most recent figures, is 12.4 percent, fifth highest in the nation behind only such economic basket cases as Michigan and South Carolina. California’s second-largest city, San Diego, is known as America’s Finest City but hasn’t been immune to unemployment problems.

San Diego’s unemployment rate has now increased to more than 10 percent from 7.5 percent a little more than a year ago. This means an additional 38,000 people unemployed in the San Diego area. For them, like all those now unemployed in the state, the news gets worse.

California ranked 11th highest in the country for 2008, the most recent year for which data are available on the percentage of workers unemployed for more than 27 weeks, which the Bureau of Labor Statistics defines as persistent unemployment. More specifically, 21.5 percent of the unemployed in California in 2008 were without work for more than 27 weeks.

Over the previous five years, predating the recession, California ranked 12th highest in the country with 19.9 percent unemployed for more than 27 weeks. Those unemployed in California tend to be so for longer periods than in other states, and this sorry situation existed well before the onset of the recession.

The labor situation is even bleaker once marginally employed and part-time workers who want full-time work are included. The Bureau of Labor Statistics’ alternative measure of labor utilization, designed to capture more than just the unemployed, includes “marginally attached” workers and “part-time workers for economic reasons.”

California’s average rate for 2009 was a startling 21.1 percent. More than one in five workers in the state is either unemployed, marginally employed or working part time when he or she wants full time work. Only Michigan had a worse rate (21.5 percent).

Part of the problem in California is cyclical and related to the national recession. The state’s problems, however, predate the recession, and that reveals a structural issue. The single greatest marker of the economic crisis facing the Golden State is our labor market. And it is here where the solutions must begin.

What steps can California take to revitalize our labor market and put people back to work? The heart of the solution is making California a more attractive place for businesses to establish, grow and prosper. Right now, unfortunately, the regulatory, tax and overall business climate remains antithetical to those ends.

California needs a dramatic U-turn on business policies. The first step is large-scale tax reform aimed at dramatically reducing marginal personal income tax rates and

reducing, if not eliminating, the state’s corporate income tax. Such a move would boldly signal to businesses and investors that the state is open for business again. (Revenues can be partially replaced through a reformed value-added sales tax.)

But taxes are a function of government spending, and part of our structural problem is that spending has outpaced any semblance of restraint. The state and local governments must control spending, and there’s plenty of room for improvement. The most recent data indicate that California has one of the five largest government sectors in the country.

Beyond taxes, for too long the state’s regulatory apparatus has been oblivious to its effect on business. The state must implement an immediate moratorium on all new regulations that impose any costs on business. California should also review existing regulations in order to eliminate or streamline those most costly to business.

The current economic malaise and high rates of unemployment are unacceptable. The priority must be creation of the right environment for business investment and entrepreneurship. That is the way San Diego should proceed to lower its unemployment rate from more than 10 percent to less than 7.5 percent. America’s Finest City can thus set an example for the entire state and the nation.

Clemens is the director of research and the coordinator of the California Prosperity project at the Pacific Research Institute in San Francisco.

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.

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