Taxable Talk

In most of the world, economics follows the rules you learned in school. If prices increase and the supply stays constant, demand falls; if supply decreases and demand stay constant, price increases, etc. But I’m a resident of California.

California faces a $14 billion budget deficit. As I earlier noted, Governor Schwarzenegger will be calling a special session of the Legislature in early January to deal with the deficit. Given that Assembly Republicans are vowing no new taxes and Assembly Democrats don’t like the idea of cutting programs, it should be interesting.

But that’s not the point of this article. Given the budget situation, what sane politician would propose a new tax? How about new taxes? Well, Governor Schwarzenegger and Assembly Democrats have brokered just such a package with their health care initiative.

This proposal, if it passes the Legislature, introduces three new taxes: an additional $1.75/pack cigarette tax, an employer health care tax, and a 4% surcharge on hospital stays.

Let me first note basic economics. These taxes will raise prices, thus causing demand to drop. The revenue projections won’t be met, and taxes will need to be increased further in order for the program to be funded at the level proposed.

Second, consider California’s business climate. It’s bad—California ranks 47th out of 50 states. What sane business owner would expand a business in California when neighboring states offer a much better business climate?

Third, the proposal likely violates federal law. There’s a federal law, ERISA, which courts have held prohibits states and local governments from mandating employee benefits. Indeed, just last week U.S. District Judge Jeffrey White ruled that San Francisco’s law mandating health insurance violates ERISA and threw it out. While San Francisco plans on appealing the decision, there’s lots of precedent that they’ll have to fight through.

For California’s future the state’s political leaders need to look at cutting taxes. Though this may sound difficult to impossible in a time of budget deficits, the Laffer curve has shown that lowering tax rates increases tax collections. But I’ll be shocked if we see any tax decreases.

Perhaps I’ll be surprised at the Legislature’s actions in 2008. And perhaps pigs do fly….

Wall Street Journal Editorial
Assemblyman Doug LaMalfa on California’s health care plans

In California’s last fiscal year (July 1, 2006 to June 30, 2007), 89,000 more people moved out of California than moved into the state. This is according to the annual report of the California Department of Finance. The state still grew in populations, based on births and immigrants from abroad.

Why are families emigrating from the Golden State? Could it be California’s high individual income tax, which it makes it much less of a Golden State for retirees than neighboring states such as Nevada? Could it be that California’s abysmal business climate (the state ranks 47th) is driving businesses from the state? Perhaps it’s a combination of both.

The Los Angeles Times quotes Howard Roth, Chief Economist of the Department of Finance, as stating, “[The exodus] won’t be the lasting problem we had in the 1990s. It will go away.” Is he correct?

I have my doubts. The state has a $14 billion budget deficit. Democrats in the legislature are talking about cutting various tax deductions, such as the mortgage interest deduction, and are looking at other schemes to close the gap such as increased user fees and tax increases.

If and when Sacramento gets serious about cutting the state’s bureaucracy I’ll agree with Mr. Roth that the exodus is temporary. If not, it may be something that’s much longer lasting.

News Story: Los Angeles Times