California Republicans have typically been huge fans of tax cuts, largely because slashing revenue makes government smaller. Call it Grover Norquist’s “drown it in the bathtub” argument.
But state Insurance Commissioner Steve Poizner, a GOP candidate for governor, wants to leap back to the supply-side economics of Ronald Reagan’s presidency, calling for big-time cuts in California’s taxes because that will bring in even more money for the state.
Cutting the sales tax and corporate and personal income taxes by 10 percent, and slashing the capital gains tax in half, would unleash an economic boom in the state, Poizner told the Los Angeles Chamber of Commerce Tuesday.
“A broad across-the-board tax cut to jumpstart the economy is the cornerstone of my sweeping economic reform plan to save California,” he said.
The rest of Poizner’s plan is pretty much plain vanilla Republican stuff: tort reform to limit non-economic damage awards by juries, easing labor rules to aid employers and making it easier and faster for businesses to get needed permits.
But the idea of chopping about $9 billion in revenue from the state’s already overstressed budget – and promising that it will make things better financially for California – isn’t an argument that’s heard very often.
“I wouldn’t be surprised if it takes time for people to agree with me,’’ Poizner admitted.
The supply-side argument has always been that high taxes discourage economic activity or, in California’s case, send businesses fleeing to Arizona, Nevada or other lower tax states.
Cutting those taxes will keep businesses in the state, encourage them to expand and boost California’s tax revenues, even with the lower tax rates, Poizner said.
Maybe so, maybe no. For every economist who points at President John Kennedy’s tax cut in the early ‘60s and Reagan’s cuts in the ‘80s as evidence that the country can slash its way to prosperity in a no-pain, all-gain effort, you can find another muttering “TINSTAAFL,” or “there is no such thing as a free lunch.”
Those decades of battles between the supply-siders and the more traditional economists, replete with arcane graphs, dueling numbers and very difference views of recent economic history, show why President Harry Truman, despairing of the lack of clear, consistent economic advice, said that he wanted “a one-handed economist. All my economists say on the one hand, on the other.”
But one difference between California and the federal government is that the feds have a printing press and California doesn’t. The federal government can and does run budget deficits for years, but the state can’t do that.
California can and has used plenty of smoke, mirrors and other budget magic to make the numbers fit in its annual financial statement, but the budget has always been balanced when the governor puts his signature at the bottom (and sometimes out of balance minutes later, but that’s another story).
Speaking to reporters on a conference call Tuesday, Poizner argued that despite rising taxes, the state “hasn’t been able to balance a budget in how long?” That would come as a surprise to the legislators who worked desperately for months to close a $60 billion budget gap that would have been way easier to ignore now and hope for better days to come.
So if Governor Poizner decides to trim $9 billion in tax revenues from the budget in one year, something has to give.
No problem, he said. “The impact (of the tax cuts) is quick and immediate … There will be a big, bold and positive reaction.’’
But, unlike the federal government, California can’t just turn on the money machine to cover the time it will take for increased business activity to make up for that lost tax revenue, if that happens at all. If money comes out of the budget, it has to be replaced – or programs cut – that same year, not at some nebulous time in the future when all fiscal prayers will be answered.
If people don’t like his plan, they shouldn’t vote for him, Poizner said. But he’s placing a huge bet on his vision of a permanent solution for California’s money problems and he’s going to be spending a lot of time answering nervous questions about that plan between now and next June’s primary.
John Wildermuth is a longtime writer on California politics.