Last year Gov. Jerry Brown convinced voters to approve Proposition 30, which raised the top marginal income tax rate to 13.3 percent and the sales tax from 7.25 percent to 7.5 percent. Both income tax rates and sales tax rates are the highest in the nation, and were promised to prevent $6 billion worth of dreaded “trigger cuts” from coming into effect.
Pundits seem to love Brown’s proposed 2013-2014 budget, and it even appears to be almost balanced. However, several things seem to go unnoticed by budget analysts and the popular narrative remains incomplete.
The Governor’s rationale behind Proposition 30’s tax hikes promised the prevention of further deep cuts in desperately needed government services by stabilizing funding. The actual numbers tell a different story.
The total budget for 2013-2014 is almost $145.8 billion, compared to last year’s $142.4 billion. However spending in this year’s general fund—the account where income and sales taxes are dumped—grew from $91.3 billion to $97.7 billion.
That $6.4 billion difference is around the annual total increase in taxation projected under Proposition 30. The state government has simply raised spending in the general fund by more than $6 billion in line with new incoming Proposition 30 revenue. Instead of the terrifying prospect of cutting another $6 billion in additional spending, Brown could have frozen general fund spending and left tax rates unchanged, but still enjoy the same financial situation.
Alas, the public has again been hoodwinked by the fallacious alacrity inherent in baseline budgeting; the tendency to claim that a smaller than expected increase in government spending is actually a draconian spending cut. This practice is akin to a teenager taking his parents’ credit card, buying a $75,000 Mercedes instead of a $150,000 Rolls Royce and complaining that he “cut” 50 percent of his spending and reassuring his parents that he “saved” $75,000.
Sadly, California’s newly projected surplus might prove a fleeting chimera.
After New Year’s “fiscal cliff” deal raised capital gains taxes from 15 percent to 20 percent, many investors sold stocks and bonds before the deadline and, since California taxes such investment income at regular income tax rates, the state enjoyed a one-time financial boost. Surprisingly, the budget frankly admits that “The (revenue) forecast includes a shift of capital gains, dividends and wages from 2013 into 2012 as a result of the expected increase in federal tax rates.” However, today’s gain is tomorrow’s loss as investors sell less of their assets under the new tax rates and prices adjust to these higher tax rates by remaining artificially depressed.
Further, California Democrats’ newfound legislative supermajority chomps at the bit to restore previous funding levels to their pet programs. Announcing a projected future budget surplus in front of California politicians is like dumping chum into a school of circling sharks—sure to start a feeding frenzy. Unless the State Senate and Assembly display unimaginable restraint, a renewed shopping spree is likely, and Brown’s veto stands as its only opposition—a dubious reassurance from a man who once pushed for California to purchase its own orbiting satellite and now labors as chief apologist for the exorbitantly expensive high speed rail venture.
Some states seem to be headed in the opposite way as California, which is seeking to reduce or eliminate stifling income and corporate taxes while compensating with restrained budgets and higher sales taxes. The logic behind such proposals judges income and corporate taxes as impediments to investments and savings that discourage economic growth and production.
Sales taxes act as a tax on consumption, exerting less economic drag and eliminating redundant levels of taxation.
Virginia, Florida, New Mexico, Idaho and Ohio are all mulling proposals to overhaul their tax systems in order to attract new business and foster the greater development of wealth. Louisiana Gov. Bobby Jindal is pushing the most radical proposal to promote investment and savings—by eliminating both the state’s income and corporate taxes while raising the sales tax and crimping special interest exemptions to compensate. These proposals could increase the Pelican State’s attractiveness for new business and investment, thus pushing down unemployment and boosting the state’s economic competitiveness.
While Brown pushes California in the direction of fatter budgets combined with higher income and sales taxes, perhaps such proposals can show which economic model—high expenditure and high tax, or low expenditure and low tax—is better for growth and wealth creation.
Unfortunately, continued budgetary malfeasance and the public’s uncritical reception to supposed fiscal discipline will reveal a salient contrast for years to come.