Carnegie Mellon University economist Allan H. Meltzer’s Wall Street Journal article Wednesday contains some thoughts that can be applied to California’s upside down fiscal situation.
One point Meltzer makes is that, "High uncertainty is the enemy of investment and growth." Businesses uncertain if tax laws will change pull away from hiring more employees or building more facilities until they know what to expect.
Corporations in this state face uncertainties on the tax front that will cause them to hesitate investing in their California operations. That in turn will keep the Golden State unemployment rate high and economic growth subdued, which only extends, if not deepens, the state’s economic chaos.
Last February, the legislature and governor agreed to change the tax law so that beginning in 2011, multi-state corporations can base their state income taxes on in-state sales, rather than the current formula that includes property, sales, and employees. The goal was to encourage economic growth through job creation.
Small business benefited from the tax package by allowing net operating losses to be paid off over a couple of years. This would allow new or struggling business an opportunity to gain its footing instead of being overwhelmed by tax obligations.
Now, however, the tax reform is back on the table as Democrats are suggesting the tax change measure be repealed as part of this year’s budget fix. The Democrats say the tax change should not go into operation, which they claim will deprive the state of needed cash in the coming year.
Professor Meltzer has an answer for that kind of thinking. He noted in his column the permanent reductions in corporate and marginal tax rates under Presidents Kennedy/Johnson and President Reagan had a crucial role in boosting the national economy.
Yet, California business can’t count on the tax reform package. Not only are influential Democrats calling for a repeal of the law, Proposition 24 on the November ballot will also repeal the tax breaks if passed by voters.
Uncertain times for business mean uncertain times for California’s treasury. If business does not know what the tax picture will be they will not invest and will not hire. As Professor Meltzer concluded, reducing uncertainty and encouraging growth, will end deficits and a jobless recovery.
The same idea will help California recover – employ long-term strategies to grow the state out of its fiscal problems.
Unfortunately, here in California the uncertainty will remain at least until the election is over.