Growth is the only solution to state’s crisis

Most of the proposed solutions for California’s budget problems – spending cuts, tax increases, infrastructure spending – attempt to patch a Band-Aid on a festering wound but do not address the underlying causes of the infection – an economy weakened by improper nutrition and the wrong medications.

We cannot cut, tax or spend our way out of a deficit this massive – now estimated to reach $41.8 billion over the next 18 months. The only real solution is economic growth. That means more businesses creating more jobs – and thereby replenishing the state coffers.

If California wants to jump-start our economy, we do not need an “economic stimulus plan” of more government spending and failed management that consume rather than create wealth. We need an economic freedom plan – to free up businesses to create jobs.

An economic freedom plan will provide our economy with the proper nutrition. It will encourage entrepreneurship and job creation to keep our economic body healthy and our citizens employed.

We need to look at what works in other states that are attracting jobs and producing rapid income growth, compared to our own mediocre performance. Instead of a wet blanket, we should be putting out a welcome mat for employers.

Yet California ranks a dismal 47th out of 50 states in economic freedom, according to a recent study by the San Francisco-based Pacific Research Institute and Forbes, measuring taxes, regulations and burdensome lawsuits that businesses face.

California’s unemployment rate – 8.2 percent in October – is dramatically higher than competing states, such as Colorado at 5.7 percent, Idaho at 5.3 percent, New Mexico at 4.4 percent, South Dakota at 3.3 percent and Texas at 5.6 percent.

Here is why: The burden California places on employers is among the highest in the nation. California has the highest income tax rate in the nation, at 10.3 percent. Since most small businesses pay taxes as individuals, these confiscatory tax rates kill jobs and drive entrepreneurs to other states. California’s corporate tax rate for 2008 is 8.8 percent, vs. 4.6 percent for Colorado, 5.8 percent for Nebraska and zero (no corporate taxes) for South Dakota.

These roadblocks to growth harm people’s opportunities to find jobs and decrease revenues to the state.

A recent Wall Street Journal analysis of Census Bureau data found that between 1990 and 2007, personal income in Florida and Texas, which have no personal income tax, grew 50 percent faster than in California and New York, which have among the highest tax burdens in the country. Personal income grew 89 percent in Texas and 74 percent in Florida during that time period, while California’s grew only 48 percent and New York’s 36 percent. It is not surprising, the Journal reports, that about a dozen of the 58 Fortune 500 corporations that once called California and New York home have departed.

Underscoring the employment impact of freer economies, Pacific Research reports that in 2005, the unemployment rate for the 15 freest states, based on its previous 2004 economic freedom report, was more than double that of California.

The answer to income growth is an economic freedom plan: cutting the corporate and personal income tax rates and reducing onerous regulations. This would provide the nutrition our economy needs to be restored to health.

Yet the medicine being prescribed, such as a federal bailout, a sales tax increase and more borrowing will just cause the wound of deficit spending to bleed more. These “solutions” are the equivalent of trying to cure a gash caused by slamming into a piece of cut glass by stabbing ourselves a few more times with the shard.

The cure to California’s fiscal woes is to break out of denial – and finally reject the old fallacy that we can solve all our problems by taxing “the rich” and “corporations.” This failed philosophy is simply a way for politicians to buy votes from one class of people by depleting and exhausting another class – and all lose.

Economic growth is the only real solution to our fiscal fiasco, and economic growth is only strong in states that encourage it.

If California really wants to get out of the fiscal doldrums, we need to become one of those states.

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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