California’s Legislative Analyst is projecting that the budget deficit, currently pegged at about $11 billion, might grow to $28 billion. What does the Legislative Analyst, Mac Taylor, want to do to cure the problem? A 5% income tax increase.
I don’t expect Republicans in the legislature to support the Legislative Analyst’s proposal. Increasing California’s income tax rate to 14.3% (15.3% on income above $1 million) will be welcome news to the development authorities in Nevada, Arizona, Oregon, and Colorado. If this tax increase were enacted—again, I doubt this will happen—and President-Elect Obama’s probable tax increase were enacted, self-employed Californians would face marginal tax rates of above 72%. With such confiscatory taxation Californians will react by creating strategies to avoid taxation. Clearly one step would be to move. There’s no doubt in my mind that actions like that would occur, and that California will be stuck in a cycle of ever-increasing tax rates.
The only way to cure this is to drastically cut spending. Spending needs to match revenues. Ideally, California should cut tax rates rather than increase tax rates. Cutting taxes would help encourage business to relocate here rather than elsewhere. Unfortunately, the odds of tax cuts in California are less than zero.
I have no idea where the Legislature will head on this issue. Smoke and mirrors won’t work anymore. The Democrats won’t cut spending. The Republicans won’t vote for new taxes. Both sides need votes from the other side.
I’ll keep you informed.