Rumors abound that there is progress on a budget deal. Unfortunately, if the rumors are true, such progress involves major tax increases: A once cent hike in the Sales and Use tax, an across the board income tax hike, a gas tax increase, and a higher vehicle license fee. These are all bad ideas.
The sales tax is a destructive, unfair tax. America is becoming a service oriented economy to such a degree that the sales tax no longer works. Raising this tax makes an unfair situation for retailers worse. Look around at just about any strip mall in California and you will see storefront after storefront that is the former home of a failed retail business. This is the devastation wrought by the combination of a recession mixed with a high tax. The rumored budget deal proposes to hike the state’s portion of the sales tax from 5 percent to 6 percent. This is a 20 percent increase in the state rate. This will suppress consumer demand, and/or divert it to online vendors. In many jurisdictions it would take the overall rate to 10 percent. This would be a catastrophe for our retailers. According to our economist at the Board of Equalization, a 1 cent per dollar increase in the sales tax translates into 58,000 lost jobs. The suppression of economic activity would also suppress sales tax revenues by 8 percent for every point the sales tax is raised. In 1990 the state had roughly 900,000 retailers. 19 years later, we have roughly 1 million. This is an 11 percent increase, which might sound good except the state’s population went up 44% in the same period. Yet, the Legislature is looking to this diminishing class of businesses for more revenue, which makes no sense at all.
A higher income tax is also not constructive. The problem is when California raises income taxes, like increasing the sales tax, the state actually collects less money. As I have argued many times, raising taxes makes people change their behavior. When people’s wealth is not secure, they hide, hoard, and consume it — or move — rather than put it to work in pursuit of greater gains. At the root of all this is the basic fact that wealth is created only one way — by private production, not government spending.
Back in 1991, Governor Wilson bought into the liberal logic for a moment and raised taxes on the upper-income brackets. The following two years, revenues declined by $1 billion each. Income tax receipts alone came in more than half a billion less than forecast each year for the next three years.
The inescapable fact is that in the new economy, tax hikes only generate a race to the bottom. We need to compete for people and businesses. Economic growth is the engine that will drive higher revenues. If we do not lower both taxes and state spending, California is going to lose big.
February 11th, 2009 at 12:00 am
Republicans are pathetic…how are people going to pay all these direct taxes….sales tax and car tax and gasoline will sop gabillions out of the economy, raise cost of business, transportation, food costs, unemployment, phony workers comp. cheats, foreclosures, rents will fall and property deferral will be accentuated….welcome to California.