The California Tax Mirage Redux

CALIFORNIA ADMITS HIGHER TAXES KILL TAX COLLECTION

By Chriss Street

California Governor Jerry Brown was just forced to admit his supposed “$5” billion increase in January tax collection as proof that Proposition 30’s income and sales tax increases by voters passed in November was really just an early collection of taxes.  Furthermore, it now appears that the sales tax collection crash in January is a precursor of an even bigger crash coming by April.  Having already made huge promises of payback for union bank-rolling of Prop 30 and opportunists such as Texas Governor Perry luring corporations to leave the state, California is back in crisis.

Two weeks ago, California state revenues were up by $4.3 billion in January over his 2013-14 Budget.  At the time, I said that the “strong performance” was due to two one-time events that took place by December; a delay in collecting $1 billion in Christmas season sales taxes and $3.3 billion of taxes on capital gains, dividends and bonuses paid in January from the prior year.  But what Jerry Brown did not admit, was that sales taxes crashed by 27%, or $582.7 million as Prop 30, Cap and Trade and the new Democratic super-majority control of the Legislature and the Governorship finally convinced the rich to take their businesses, income and shopping somewhere else.

A week before my report, the supposedly independent Legislative Analyst’s Office said the state was on track to collect $5 billion more in tax revenue in January than estimated in the Governor’s budget.  I stated that this revenue would come from high-income earners cashing out investments early to beat the Congressional fiscal cliff settlement that raised federal income taxes by 3% and capital gains taxes by 5%.

During the Prop 30 campaign, the Howard Jarvis Tax-Payers Association and other opponents had warned that because of what is referred to as the Laffer Curve, there would be a direct inverse relationship between a rise in the rate of taxation and the resulting government revenue collected.  Ronald Reagan proved this phenomenon by cutting tax rates with the Tax Reform Act of 1986, which caused the higher economic growth and that produced generated higher tax collections and eventually balanced federal budgets in the late 1990s.

Brown’s promised that if voters approved the Prop 30 tax increases and he cut spending, his 2013-14 State Budget would achieve a budget surplus of $851 million for the first time in a decade.  I pointed out that Brown promised that to maintain a fiscal discipline by chanting a mantra he performed every night before bed while studying at a Zen monastery in Japan in the 1980s: “Desires are endless, I vow to cut them down.”

But yesterday Brown began negotiations for new contracts with the public-worker unions that represent 350,000 state workers — engineers, administrative staff, librarians, corrections officers and more – that are due to expire this summer.  Despite that fact that the average state worker salary in California is $70,777, nearly $16,000 higher than the national average, these unions expect a big pay raise for providing the millions of dollars for campaign ads and thousands of campaign foot soldiers that caused the passage proposition 30.  Brown has already promised to “restore” $817.6 million in pay in the current budget, offer $502.1 million of 2% to 5% pay raises next year and add coverage for higher healthcare costs.  He indicated executive branch salaries will also increase nearly 10% to $15.7 billion.  None of these increases include the $10 billion increase I estimate that is required to keep the current state pension solvent.

The State of California is now facing an even bigger crisis than before the passage of Proposition 30.  With the economic impacts of United States’ highest statewide sales tax at 7.5%, income tax at 13.3% and 2^nd highest gasoline tax at $.67 per gallon, low tax states, Texas Governor Rick Perry has been in private meetings with business leaders in the San Francisco Bay Area and Los Angeles Basin to lure high tech companies away from Taxifornia.  In an interview with the San Jose Mercury-News, he criticized California’s regulatory environment, and said Austin, Texas, is poised to become the “next Silicon Valley.”  He told the paper “Twelve years ago, California wasn’t looking over its shoulder.  They’re not looking over their shoulder now — they’re looking at our backside.”

 CHRISS STREET & PAUL PRESTON
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