On Friday, it was announced California’s unemployment rate hit a twelve-year high at 7.3%. On Sunday, the legislature met in extraordinary session to vote on a budget plan that would raise the income tax on upper income taxpayers and raise the corporate tax. The measure was defeated, failing to secure a two-thirds vote.
Good thing because, had the plan succeeded, the unemployment rate would likely jump even higher.
Taking money out of the economy from businesses and those who can invest in job creating enterprises is not the way to confront an unemployment crisis. It would just exacerbate the problem. Corporate tax collection was lower than expected in July according to the Controller’s monthly report, down almost 18% from the projection in the Governor’s May revise. Raising taxes on businesses won’t help that situation.
Another tax plan floating around Sacramento would raise the sales tax by one cent. This too would probably have a negative impact on jobs. The Controller’s report indicates that sales taxes are down below the May revise projections 13%.
A Board of Equalization report earlier this month indicated 58,000 jobs would be sacrificed as a result of the proposed sales tax increase. Read the Capitol Weekly account of that report here.
There is little government can do to stimulate job growth in the short term and plenty it can do to stunt job growth. Some construction type bonds have a stimulus effect as they pay for construction jobs, but that means more crushing debt for a state that has gone the bond route too often in the past. While some bonds are important and necessary, like the water bond, there are so many state and local bonds on the coming November ballot — on top of bond measures already passed but not issued — that a large increase of debt would be harmful to the economy.
In June, I wrote that raising taxes on income and business will not bring the desired results and added a 1933 quote from John Maynard Keynes about the futility of trying to alleviate deficits by increasing already high tax rates. I repeat Keynes words here hoping that the message gets through:
“Nor should the argument seem strange that taxation may be as so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more — and who, when at last his account is balanced with naught on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss."