Golden State should give back some of its gold
February 14, 2006 - A tax cut for California? It might seem a preposterous idea. After all, the state government is running a structural deficit of $6 billion. And after last November's shellacking at the polls, Republican Gov. Arnold Schwarzenegger has given up calling for spending restraint and joined the spendaholics, leaving no money to be given back to the overburdened taxpayers who support the whole house of cards.
But the real question is: Can California afford not to cut taxes? A new study by the Cato Institute, “State Revenue Boom Paves the Way for Tax Cuts,” indicates that now is the right time for high-tax states to cut taxes and make themselves more competitive.
The Golden State is one of 28 states and the District of Columbia that the study identifies as “most in need of tax relief” because they “have rapid revenue growth, a high overall tax burden and high income tax rates.”
California's tax revenue zoomed upward 16 percent between 2002 and 2005. Its state and local tax burden in 2004 was 10.9 percent of personal income, 14th highest among the states and D.C. Its top individual tax rate of 9.3 percent in 2005 (now 10.3 percent), was third-highest.
What about that structural deficit? “That just means spending is out of control,” Chris Edwards said; he's the study's author and director of Tax Policy Studies at Cato. “Any legislature in any state can balance the budget anytime if it wants to by cutting spending. They don't want to. That's the problem.” Indeed.
If California doesn't get its budget act together and cut not only spending but also taxes, the consequences could be dire. Edwards said that some companies will always want to have a minimal presence here because of our high tech-areas, just as financial-services companies will always want to have some workers in Manhattan.
“But there is an increasing number of companies that have a choice where to locate,” he warned. High-tech companies can keep some personnel in Silicon Valley, while moving most of their people to lower-tax areas in other states or countries. “Taxes are one reason why they would avoid California.”
Given that California's “action” governor isn't acting in this area, perhaps what's needed is an initiative to cut taxes. Better yet, there could be competing tax-cut proposals on every ballot, beginning this November.
Let the voters decide how much they want to lift their immense tax burden.