California’s ongoing budget problem brings with it an endless supply of commentary and proposed fixes. Not long ago, I wrote that California now has a revenue problem. Long before that, I wrote The New Conservative Paradigm that suggested that we need a true part-time legislature, 2 year budget cycles, a true budget cap, pension reform, sun setting of programs, zero based funding and cost/benefit analyses for all spending programs – to name just a few necessary reforms.
The tax issue, as readers of my columns well know, is of particular concern to me. Simply stated, the California tax burden is too high – which, when combined with the national tax burden, the 2nd highest in our history – ensures that the California economy will be slow for years to come.
In light of that, I took great interest in Dan Walters’ column in yesterday’s Sacramento Bee entitled: Are California taxes too high or too low? Walters cites a study which says that California had the 6th highest state tax burden in 2008. Of course, that means California is not the worst. But Walters’ column does not tell the whole story that we need to know. Here is why:
1. The 5 States of above us are not competitors of California. The states with higher tax burdens than CA are: #5 Hawaii, #4 Maryland, #3 Connecticut, #2 New York and #1 New Jersey. Those states are all far away from California and aren’t California’s chief competitors for business and jobs.
2. California’s competitors are low tax states. Note the ranks of California’s chief competitors: Oregon #26, Colorado [now home to many of CA’s aerospace jobs] #34, Arizona # 41, Nevada #49 and Alaska #50! We directly compete with those states.
The point here is that the issue of whether California is or is not taxed enough is not simply a question of where it is ranked nationally.
Nor is our problem limited just to tax rates. All other things being equal, it’s possible the #6 highest tax burden would not be completely devastating. But things all other things in California are not equal.
Why are they not equal? Because it gets worse. CA’s overall business climate is even more uncompetitive than its tax ranking. CA is ranked #48 in the country when it comes to the business climate. That’s true even though part of the ranking is based on raw materials – of which California is rich. The states around us rank much better. Arizona is ranked #22. Liberal Oregon is ranked 9th best!! and Nevada is ranked #3.
In other words, the real issue is where we rank against our regional competitors on a variety of factors including taxes. By that measure, we rank dead last and it is no wonder that California jobs are headed for the more comfy confines of Oregon, Arizona and Nevada. Heck, even New York poached the production of the Ugly Betty TV show by offering a huge tax break to film in New York.
Finally, do you really think all this data doesn’t really matter? If you do, consider this from the WSJ:
“Maryland couldn’t balance its budget last year, so the state tried to close the shortfall by fleecing the wealthy. Politicians in Annapolis created a millionaire tax bracket, raising the top marginal income-tax rate to 6.25%. And because cities such as Baltimore and Bethesda also impose income taxes, the state-local tax rate can go as high as 9.45%. Governor Martin O’Malley, a dedicated class warrior, declared that these richest 0.3% of filers were “willing and able to pay their fair share.” The Baltimore Sun predicted the rich would “grin and bear it.”
One year later, nobody’s grinning. One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller’s office concedes is a “substantial decline.” On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year — even at higher rates. No doubt the majority of that loss in millionaire filings results from the recession. However, this is one reason that depending on the rich to finance government is so ill-advised: Progressive tax rates create mountains of cash during good times that vanish during recessions. For evidence, consult California, New York and New Jersey.”
In sum, being equal to New York and New Jersey is not the answer to our problem – it is the problem.