Governor’s proposed tax boost a bust

The philosophic case against Gov. Arnold Schwarzenegger’s proposal to “temporarily” increase state sales taxes by one cent to fill a gaping budget void is clear. Higher taxes will slam the state during tough economic times.

As Assemblyman Chuck DeVore wrote in a recent column, “California already has the highest income tax in the nation, the highest sales tax rate, the highest gas tax, and the highest corporate tax in the West without property taxes being at the national average, combining for the 47th worst business tax climate in America. Clearly, additional taxes in this time of economic weakness would make it highly likely that California would be the last state to recover in this present downturn.”

Furthermore, higher sales taxes will only feed the beast – a state government that always seems to grow. DeVore notes that state government has increased its spending 40 percent in a mere five years, yet that’s never enough for legislative Democrats or for this Republican governor.

But if the governor and his Democratic allies won’t listen to economic reason, and express no concern about the unstoppable expansion of government, perhaps they will consider a more practical point: The tax hike is unlikely to bring in the predicted amounts of revenue, and it could cause job losses, which could cause a downward spiral of revenue. Reporting in the Sacramento-based Capitol Weekly, reporter John Howard explains that “An analysis by the state agency that collects California’s sales taxes suggests that a one-cent increase in the statewide sales tax would bring in hundreds of millions of dollars less than anticipated and cost thousands of jobs.”

That’s not a surprise even if it sounds counterintuitive. Those who push for higher taxes usually take a static view of the world. They believe that if taxes go up X amount, that consumers will continue to spend as they always have and that revenues will go up by the amount that taxes were raised. In reality, consumers react to incentives and disincentives. When interest rates go higher, fewer people finance purchases. When sales taxes go up, fewer people buy taxable goods.

Supporters of the tax typically say, “It’s only a penny.” But big financial effects occur around the margins. In this case, the chief economist of the state Board of Equalization argues, according to the Weekly, that Schwarzenegger’s tax hike plan would result in about $500 million less revenue than predicted. Not to mention a predicted 58,000 lost jobs and a loss of about $660 million in business investment, according to the Weekly report.

Unfortunately in California, officials like to impose one “small” tax or fee increase after another. The cumulative effect is enormous, leading to a business climate that is among the worst in the nation. California’s natural resources and wonderful climate still are attractions but increasingly businesses choose not to expand here or even move their major operations to more business-friendly states. It’s ironic that a governor who came into office promising to improve the business climate is proposing a plan that would undermine it.