A general economic malaise permeates everyday life in California, best illustrated by the state’s 12.4 percent unemployment rate, third-highest in the country. This melancholy has forced responses from the candidates for governor. Californians should give their ideas careful scrutiny.
In his eight-page fiscal plan, Jerry Brown offers vague and general commitments. The Democratic former governor talks about the need for better value-for-money in services and no tax increases without statewide approval. He doesn’t offer specific explanations on how he’ll achieve balanced budgets, better services and renewed economic prosperity.
Republican Meg Whitman acknowledges that the tax system needs to be simplified and competitiveness improved. Ms. Whitman wants to see revenue increasing before embarking on broad-based tax relief and relies largely on targeted, sector-specific tax cuts. This approach, while better developed, ignores the opportunity that immediate tax reform offers.
The current governor’s Commission on the 21st Century Economy recommended revenue-neutral (no tax cut) tax reforms to re-establish competitiveness and the economic incentives for investment and job creation. The commission recommended greater reliance on consumption taxes and markedly less reliance on income taxes, both personal and corporate.
Such reforms could be achieved within a year or two and signal immediately to the marketplace that California is serious about getting competitive. And the case for these reforms is stronger than ever. Indeed, on personal and corporate income taxes, two of the most influential taxes for work effort, savings, investment and entrepreneurship, California is woefully uncompetitive.
California’s top personal income tax rate of 10.55 percent is third-highest in the country. Our second-highest rate, 9.55 percent, is also high and kicks in at $47,055, a relatively low level of income. In fact, only three states have higher rates than California’s second-highest rate. Nevada and Washington don’t impose personal income taxes, and neighboring states that do have much lower rates: Arizona (4.5 percent), Utah (5.0 percent) and Colorado (4.6 percent).
At a rate of 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 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).
The dismal state of California’s economy calls for commonsense reforms such as competitive taxes and regulations that broadly promote investment and development. The solution is not some high-minded, Sacramento-centric scheme for business development in this favored sector or that select region.
Value-for-money in government services must be re-established as a priority, a tough task in Sacramento, which has been overtaken by public-sector unions. Also, the state needs radical re-thinking of its taxes. California smust rely more heavily on consumption taxes while dramatically reducing the use of income taxes.
Such reforms would establish the foundation for a more prosperous economy, which lays the groundwork for future tax relief. The long-term recipe for a return to economic prosperity is rooted in both tax reform and tax reductions.
A persistent huge budget deficit and 12.4 percent unemployment are unacceptable for a state that should be an economic leader in the nation and the world. Long after the November election is settled, that will require leadership and courage from all legislators in the Golden State.