The state’s ongoing budget crisis will soon hit full steam
as legislative negotiations intensify. If they are to craft effective
solutions, legislators must understand the nature of our ailing economy.
The headline unemployment
rate for March was 12.6 percent, which ranks California third-highest in
the nation, behind only Michigan and Nevada. The average length of unemployment
in 2009 was the fifth-highest in the country at 26.5 weeks. The state coffers
are running dry and the bond market is worried about the state’s ability to pay
its bills as witnessed by repeated downgrades to California’s bond ratings.
Too many politicos in Sacramento assume the state’s problems
are part of the larger national recession and/or that California is plagued by
a regional problem affecting other southwest and Pacific states. Both arguments
are incorrect.
Pre-recession data shows California’s economy struggled
compared to the nation as a whole, as well as to our own potential. A 2009 study
examining the most recent five years of economic performance prior to the recession
across a wide range of economic variables ranked California 38th out of the 50
states. Clearly, our economic problems pre-date the recession, are not entirely
cyclical in nature, and remain worse than those of neighboring states during
the same period.
Utah, fairing well during the current recession, ranked
fourth in overall economic performance compared to California’s 38th. Other
neighboring states also did well: Arizona (third), Oregon (13th) and Washington
State (13th). Neighboring states were able to enjoy higher rates of economic
growth, better job creation and lower unemployment, and more entrepreneurship.
They were also attracting residents.
Indeed, migration highlights California’s structural
problems. Over the five years of migration data examined, California lost more
than one million residents to other states, while our neighboring states
attracted almost the same amount. Residents were voting with their feet for
economic prosperity, which meant leaving the Golden State.
Put simply, governments at all levels in California, through
their tax, spending, and regulatory policies, have slapped a "Closed for
Business" sign on the Golden State.
A recent study,
part of the California Prosperity Project at the Pacific Research Institute, which
compared tax policy across the 50 states, highlight California’s structural problems.
The results are instructive: when the burden and design of California’s tax
system are combined and compared to the other 49 states, we rank dead last.
More specifically, California had the fourth-highest burden
of government in the country. State and local spending represented 18.3 percent
of the state’s economy in 2007, the most recent year for which information is
available.
The design of the tax system also matters because the way
resources are extracted from the economy (taxes, fees, etc.) influences the incentives
to work, save, invest, and be entrepreneurial, the foundations of a prosperous
society. Take California’s personal income taxes. Our top marginal rate – 10.55
percent – is the fourth-highest in the country and we have the third
most progressive rates among the states.
California’s corporate income tax rate (8.84 percent) is the
ninth-highest in the nation, which is particularly worrisome because it
discourages investment. We also have the country’s highest sales tax rate, 8.25
percent, and despite Prop 13 protections we only rank 17th in the nation for
our property tax burden.
The painful lesson of economic reality is that incentives
and competitiveness matter. When you create a policy environment within which work,
savings, investment, and entrepreneurship are punished instead of promoted, you
shouldn’t be surprised when you get less of it. Similarly, when a state’s tax
rates are out of line with its neighbors, we shouldn’t be surprised to find individuals,
families, and businesses moving to other states.
This core lesson of incentives and competitiveness must
resonate in Sacramento and across the counties and cities of this state. On one
tax after another California is not only uncompetitive with its neighbors but
we impose punitive rates on the very things we desperately need, such as investment
and entrepreneurship. The solution is a smarter tax policy that will reconstitute
the incentives for work, savings, investment, and entrepreneurship.
Jason Clemens is the director of research and the
coordinator of the California Prosperity Project at the Pacific Research
Institute in San Francisco (www.pacificresearch.org).
He is also a co-author of the most recent study in this series, Taxifornia.