Buried under the political headlines in California, which largely focus on Jerry Brown’s gubernatorial victory, Barbara Boxer’s winning a fourth Senate term and the Republican takeover of the House of Representatives, lie two ballot decisions that will have serious long-lasting consequences for the California economy.
The first is the rejection of Proposition 23 by a fairly wide margin (59-41). This measure would have suspended Assembly Bill 32, the state’s 2006 carbon emission law, until the state’s unemployment rate declined to 5.5 percent for four consecutive quarters.
There is a broad consensus that the net effect of AB32 will be to reduce employment in California. Analyses by the Legislative Analyst’s Office, PRI, and the Small Business Roundtable agree that AB32 would reduce jobs in the state. An analysis by Benjamin Zycher for PRI calculated that foregone job creation from the implementation of AB32 would amount to more than a half-million in 2012 and around 1.3 million by 2020.
It’s not even clear that AB32 will deliver net reductions in carbon emissions because it affects only California. For example, it is generally agreed that one of the industries AB32 will hit hard is cement manufacturing. It’s entirely possible that AB32 will force many or even most cement businesses out of state. California’s construction and related industries will still need cement, however, which means a net increase in emissions.
The reason for the increase is that the cement will still be produced, just in another state. The longer transportation requirements will create additional emissions. AB32 will thus export jobs and economic activity out of the state, while increasing total emissions. That amounts to a loss for everyone.
The other ballot initiative that seems to have been misrepresented into victory is Prop. 25. It garnered 54 percent support based on its main advertised goal of severely punishing state legislators for not passing a budget on time, which most Californians would likely support. However, the critical economic component of the proposition is troublesome.
It now takes only a simple majority of legislators to pass a state budget rather than the previously required two-thirds. Despite campaign claims to the contrary, it seems more than likely that tax increases contained within the general budget, as opposed to stand-alone tax increase proposals, will now be approved by a simple majority.
Moreover, higher spending will be facilitated, and so the pressure for tax increases will be increased. To date, the Republican Party has been empowered to resist and at least constrain the appetite for spending and tax increases because the Democratic majority in both houses of the Legislature required partial support from the Republicans to pass a budget. The approval of Prop. 25 eliminates the need for any Republican input or support.
Given the powerful and vested-interest constituencies in the Democratic Party, it seems more likely that spending will increase in the coming budget. That will require some mix of tax and fee increases, in a state where taxes are already among the highest in the nation.
Depending on the calculation, California’s government sector (state and local) is the fourth- to 10th largest among the 50 states. A recent analysis of value-for money in public spending ranked California 21st among 24 industrialized countries. Two prominent studies of tax competitiveness released in 2010 ranked California 49th and 50th, respectively.
California is already uncompetitive in terms of the size of government, value from government services, and taxes. Easing passage of a budget with higher spending and taxes will have profound negative implications for economic performance in the Golden State.
With unemployment sitting at 12.4 percent, third-highest in the country, it makes no economic sense to implement legislation that even risks, let alone virtually guarantees, more job losses and economic stagnation. Unfortunately, that is exactly what the outcomes on Props. 23 and 25 have done.