Memo to Candidates – Dire Economy Calls for Deep Reforms

California’s unemployment rate is 12.4 percent – third-highest in the country – but that statistic fails to tell the whole story of our economic woes. If marginal workers and those forced to work part-time are added to the base unemployment rate – what the Bureau of Labor Statistics refers to as unemployment and underemployment – that number reaches 21.9 percent, more than one-in-five workers in the state and the highest in the nation. These dire conditions cannot be blamed entirely on the current recession.

A 2009 study, which relied on pre-recession data, ranked California 38th out of 50 states in economic performance. Much of the explanation for this under-performance rests on the policies in Sacramento and across the state at county and city levels. California’s political class has created disincentives for work effort, savings, investment, and entrepreneurship, the very foundations of prosperity.

Our recent study, Taxifornia, explains how the state has created tax barriers to prosperity and economic growth. California’s top personal income tax rate of 10.55 percent is third-highest in the country. Our second top rate, 9.55 percent, is also high and kicks in at $47,055, a relatively low level of income. Only three states have higher rates of personal income tax than California’s second-highest rate.

Nevada and Washington do not impose personal income taxes at all, and neighboring states have much lower rates: Arizona (4.5 percent), Utah (5.0 percent), and Colorado (4.6 percent). California’s personal income tax system is also the third most progressive in the country, which means that as people earn more income, they pay a progressively higher tax.

At 8.84 percent, California’s corporate income tax is the eighth-highest in the country. Two of the six states that do not impose corporate income taxes are neighbors of California: Nevada and Washington. Even neighboring states with corporate income taxes impose them at much lower levels: Utah (5 percent), Colorado (4.6 percent), and Arizona (6.9 percent).

California also maintains the highest state and local sales tax rate in the country, and despite Prop 13 protections, a full 15 states impose lighter property-tax burdens. These tax rates, and the resources they extract from the private sector, have consequences.

California has the 10th-largest state and local government sector in the country (2008). State and local government spending represented 22.3 percent of the state’s economy. If Californians enjoyed the 10th-best education, transportation, and social safety net, then the 10th-highest burden of government might make sense. Here again, the state falls short.

Another recent study in our California Prosperity series, No Bang for the Taxpayer’s Buck, compared the outcomes and cost of government programs like education, health care, and infrastructure in the state against 23 industrialized countries. The analysis was based on a study and methodology developed by noted economist Antonio Afonso and his colleagues.

In terms of program and service outcomes, which ignore costs, California ranked a dismal 22nd among 24 jurisdictions. California was 12-percentage points below average in its ability to deliver outcomes in areas like education, health care, and infrastructure.

California improves slightly when cost considerations are added. We rank 15th among the 24 jurisdictions. These measures allow a calculation to determine the “wastefulness” of government spending. In this case, California scored a woeful 0.72 and ranked 21st out of the 24 jurisdictions. The score implies that, with the current level of government spending, California’s government performance is 72 percent of what it could be, if it were providing services efficiently.

Current conditions are unacceptable for a state with so many natural assets. Democratic candidate Jerry Brown calls for a “fundamental re-think” of government in California. Unfortunately, nothing in the fiscal platform of either gubernatorial candidate suggests serious, broad reform. Rather, both candidates offer more modest, incremental changes. The depth of our problems calls for a much deeper and broader solution.

Entire programs must be eliminated and those that remain must be massively reformed to give taxpayers value for their money. Public sector wages and benefits must be reviewed and brought into line with their private-sector counterparts. A wholesale revision of the state tax code will need to be completed to promote work effort, savings, investment, and entrepreneurship in the state. These reforms will require courage to challenge powerful vested interests in Sacramento and across the state. Nothing short of a fundamental re-think will allow California to attain its proper place as a world leader in economic growth and prosperity.

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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