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Smaller Government is Only Solution to Budget Crisis – Pacific Research Institute

Smaller Government is Only Solution to Budget Crisis

The debate over California’s fiscal crisis continues, with the governor seeking constitutional limits on spending and others calling for a flat tax or mechanisms such as “paygo.” Yet in order for any of these proposals to work, California citizens need to stop looking to the state to run their lives.
The people of California are in such dire straits precisely because they have put so many of their eggs in the basket tossed around by politicians in Sacramento. It’s a safe bet that most Californians would not let politicians choose their babysitter, the person they will marry or their occupation. Yet Californians trust these same politicians with control over education, health care and the economy.

The actual people in office get a bad rap, many deservedly so, but the system is rigged so that even monks would be running huge deficits after a few years in power. Politicians have access to billions of dollars with only one string attached: They need to spend this money to convince 51 percent of the people who turn out on election day to vote for them. This reality will not allow fiscal discipline to emerge on its own.

California is caught in a vicious cycle. Interest groups lobby for more money and regulatory favors, and the public always approves another tax hike on “the rich” to pay for it all. But tightening the screws on the state’s most productive members will encourage more of them to move away, and discourage new entrepreneurs from coming to the Golden State. The so-called millionaire’s surcharge puts California’s top personal income-tax rate at 10.3 percent, the highest in the nation.

Some enthusiasts for more spending and taxes claim that such supply-side musings are nothing but a myth. In this view, rich people do not care whether they are taxed at 10.3 or 2 percent because they have the ability to pay. The data, however, show that marginal tax rates really do matter. Consider, for example, the migration patterns of U.S. citizens among the states.

From 1981-2004, the top marginal tax rate on personal income alternated from 11 to 9.3 percent through two different cycles. During the years when the rate was 11, Californians on net tended to move out of the state. During the years when the rate was 9.3, Americans from other states moved in. The connection is striking, especially for such a modest swing in tax rates.

Because of this migratory phenomenon, a soak-the-rich “solution” to the present budget crisis will be short-lived. It is true, people won’t shut down factories or relocate their professional practices overnight because of a tax hike, and it may seem that a tax hike comes with no hangover. But as time passes and people adjust to yet a greater chunk of their livelihood being taken, they will produce less, work fewer hours, or leave the state altogether.

The politicians in Sacramento need to solve the current budget crisis. But if they opt for more taxes to close the gap, they only ensure there will be another crisis, and that it will be even worse. A better solution would be to balance the budget through spending cuts. The only way this can work is if Californians stop looking to the state to run their lives and rely more on the private sector, which does a better job than government of meeting their needs.

Robert P. Murphy is a fellow at the Pacific Research Institute. Contact him at RMurphy@pacificresearch.org.

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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