Economist Milton Friedman said, and was proved right many times over, that nothing is so permanent as a temporary government program. The same could be said for temporary taxes. They’re about as eternal as death.
It’s actually a ghost we are considering here, though, tax hikes authorized by Proposition 30 in 2012 that were to die within a few years but will live on to haunt Californians if they are extended by Proposition 55 this fall.
Prop. 30 was approved by voters as a means to continue funding state schools without cuts. The initiative hiked sales taxes and bumped up income taxes — retroactively — on the state’s wealthiest residents, those making more than $250,000 a year. The new sales tax rate expires this year, the income tax increase at the end of 2018.
No tax hike, even a “temporary” one, is harmless. An analysis released last month by the Kersten Institute for Governance & Public Policy found that Prop. 30 had a “significant and immediate chilling effect” on California business activity. Small businesses, said David Kersten, were hit particularly hard.
As Kersten points out, the fallout from Prop. 30 began right away. The Central Valley’s Daily Democrat reported in February 2013, just months after the tax hikes were passed, that the exodus of the wealthy had begun. Chris Plastiras, a realtor in the Lake Tahoe area, told the Democrat that due to Prop. 30, well-heeled Californians were “buying fast and furious” in Nevada, where there is no state income tax. He said he’d “never seen anything quite like this.”
A year later, Lee Schneider, a California hedge fund salesman, told the San Francisco Chronicle that Prop. 30 was the “deciding factor” behind his move from Walnut Creek to Texas, another state with no income tax.
The Chronicle reported that Schneider’s new neighborhood in Austin “is full of cars with license plate frames from California dealerships,” and told his story about “a flight from Austin to Los Angeles shortly before Christmas,” in which “11 of the 12 seats in the emergency row were occupied by people who had moved from California to Texas.”
Schneider said that just before he left California he built a $2 million home at the foot of Mount Diablo, then took a loss on the sale. But, he told the Chronicle, “I can make half of it back in one year of tax savings.”
This is not only a ghost story, it’s a story of a broken promise. Gov. Jerry Brown, Prop. 30’s most prominent supporter, told the people he was elected to serve that the tax hikes were going to be a short-term fix — just a little something to get by on, a plea befitting of a junkie.
But Sacramento’s big spenders and their political allies just couldn’t let that happen. Craving more, they hardly waited a year after Prop. 30’s passage to begin looking for, and eventually finding, a back-door way to perpetuate the tax hike. Now it’s Prop. 55, and it sets up a replay, extending the tax hikes through 2030.
And, again, small businesses will get the state’s boot to their teeth. Kersten believes they will bear “the brunt of the impact,” as they did with Prop. 30. Their burden eventually “will impact all Californians in terms of lost economic output and wages.”
Don’t do any California dreamin’ that this will be the last time Sacramento goes to the voters looking for a “temporary” tax hike. Voters should instead demand that lawmakers restore the conditions that made California a vibrant, dynamic state, where opportunity overflowed and an unlimited future seemed possible. That will require tax cuts, not tax hikes.