Democrats: Increase oil and tobacco taxes to close budget gap

The dedicated, selfless legislators in Sacramento have been working hard to sort out California’s budget crisis. And after months and months of negotiations, they’ve come up with solution: the taxpayers can make up the $24 billion budget shortfall.

The Bee reported on June 15th that “[t]obacco and oil severance taxes are key elements of a revenue-raising package that will be unveiled today by Assembly Democrats.”

What could possibly motivate the Democrats to suggest tax increases as a means to solve the state’s cash flow problems? Well, says Assemblywoman Noreen Evans, “[t]he problem is that this economic crisis was caused by an enormous and rapid drop in revenues, so to ignore the need for new revenues is irresponsible.”

Ms. Evans is mistaken however. While the state government’s revenue did decrease significantly, the coffers aren’t empty because of uncontrollable economic circumstances. The spendthrift politicians in Sacramento simply lacked the foresight to reduce their outgo as the recession hit and the state’s revenue base began to decrease.

The county government’s around the Sacramento area proof of this assertion. Despite facing the same hardships as the state government, nearly all of the communities around the Capital city have remained solvent and some have even announced balanced budgets for coming fiscal year. All they’re doing is cutting spending in proportion to the revenue they have lost.

The plan itself makes little more sense than the reason for proposing it. It’s the same simple-minded, economically oblivious politicking that has become customary in Sacramento in recent decades. If state officials need more money they pick an unknowing group of taxpayers and take the required funds from them using the coercive power of government.

Besides the obvious fact—and it is obvious at this point—that Californians shouldn’t be on the hook anytime their representatives make unwise decisions, raising taxes is an economically foolish proposal.

Since the ongoing recession is the reason the state’s revenue base has shrunk, the last thing anybody in Sacramento should propose is legislation that will prolong it. If the Democrats want to generate more revenue they need to encourage economic growth, and the economy doesn’t grow when the tax burden for individuals increases. The solution, though counterintuitive, is to cut taxes and thus give taxpayers “the incentive to produce more,” as economist Robert P. Murphy has pointed out. Doing so will improve California’s economic outlook and will bring in more tax receipts as a result.

But if anyone should know how useless tax increases are during economic hardship, it’s the politicians in Sacramento. Up to this point, higher taxes have failed as a means to pull California out of its nosedive. For example, as Congressman Tom McClintock has noted, when Governor Schwarzenegger increased the state sales tax by one penny per dollar in April the state’s sales tax revenue dropped by 44 percent.

More so, however, California’s leaders should know that increasing the operating costs for businesses—oil producers in this case—only prompts them to move out of state. The economic literature bears out this conclusion repeatedly. As economists Arthur Laffer and Stephen Moore have explained: “Dozens of academic studies — old and new — have found clear and irrefutable statistical evidence that high state and local taxes repel jobs and businesses.” Fewer working residents and fewer productive businesses means fewer taxes for the state government to collect.

Given this information, there is no reason to enact more tax increases. The Democrats’ plan is contrary to the evidence and should be discarded altogether by the legislature.

If you enjoyed this article, you may also enjoy:
Stop government bailoutsSchwarzenegger embraces small government, free markets to solve budget crisis

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.

Scroll to Top