Returning the state to prosperity requires action

Returning the state to prosperity requires action

As the November election approaches, Californians don’t need to be reminded of the dismal state of the Golden State. The state’s economic misery permeates Californians’ daily lives. Our headline unemployment is 12.4 percent, third-highest in the country, and increases to 21.9 percent, highest in the country, when marginally employed and part-time workers who want full-time work are added. Californians in the San Francisco area see this everyday with the region’s 10.8 unemployment rate, representing 242,500 workers trying to find employment.

The dire state of California’s labor market is emblematic of a dysfunctional economy, which explains in part the state’s perennial deficit — currently $19 billion — and our bottom-rung bond rating. If we’re interested in a robust, entrepreneurial economy that produces well-paying, stable jobs, two issues should be front and center: government spending and taxes.

Consider spending first, since it ultimately drives taxes and borrowing. State and local government spending in California represented 22.3 percent of the state’s economy in 2008, the most recent year for which data is available. In other words, state and local government command more than 1 in 5 dollars in the state. This ranks California as the 10th-largest state and local government in the country.

That could be a reasonable bargain if it corresponded with the 10th-best quality of services. Unfortunately, our soon-to-be-released study compared the outcomes of government services like education, health care, and infrastructure between California and 23 industrialized countries. The results indicate that Californians are not receiving good value for their money.

California ranked 22nd among the 24 jurisdictions in terms of outcomes — as opposed to just spending — in areas like education, health care and infrastructure. This corresponds with a performance score of 0.72, which means that with the current level of government spending, given the observed performances of other countries, California’s government delivers only 72 percent of what it could (should) if it were providing services efficiently.

The flip side of having the 10th-largest government sector is that Californians face a heavy tax burden. Making matters worse is the reality that California’s tax system relies inordinately on two of the most economically costly taxes: personal and corporate income taxes. Compounding our reliance on these inefficient taxes, our tax rates are not competitive with neighboring states.

California’s top personal income tax rate of 10.55 percent is third-highest in the country. Our second-highest rate of 9.55 percent 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 of personal income tax. At a rate of 8.84 percent, California’s corporate income tax is the eighth-highest in the country.

Nevada and Washington don’t impose income taxes at all, either personal or corporate. All of our neighboring states that do use personal and corporate income taxes impose them at much lower rates.

And our sales tax, which is poorly designed, is the highest in the country, and despite Prop. 13 protections, some 15 states have lighter property tax burdens than California.

In return for a heavy tax load, Californians receive below-average value for money from government services. Clearly, we need dramatically lower government spending, a renewed focus on value for money for taxpayers rather than largesse for public-sector unions. We need more innovative approaches to delivering services, and much lower and better-designed taxes.

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.