July 1 Tax Cut Will Boost CA Economy

NOTE: This article first appeared yesterday in Flashreport.org.

JUNE 28, 2011

By JOHN SEILER

Assuming Republicans in the Legislature stand solid, Californians could get an early Independence Day gift this year: tax cuts. And that gift will provide a needed boost to the state economy.

On July 1, the car tax drops by half a cent, from 1.15 percent to 0.65 percent. So, someone owning a $25,000 car will save $125. A two-car family with similar cars would save $250.

The state sales tax also will drop by 1 percentage point, from 7.25 percent to 6.25 percent. (Some counties also impose an additional sales tax on top of either rate). So a family spending $10,000 a year on taxable sales – school books, kids’ clothing, pipes for plumbing repair, etc. – would save $100 a year.

If one of those $25,000 cars mentioned above is bought (instead of already owned), the family would save another $250.

But let’s also throw in the tax that expired six months ago, on January 1. The state income tax dropped 0.25 percentage point, from 9.55 percent to 9.3 percent for the “top” bracket, which in California kicks in at only around $50,000 a year in taxable income. We suffer the most progressive – meaning anti-middle class – tax structure in the country.

That means a dual-income family making $100,000 a year would have $50,000 a year taxed at the “top” rate. The tax cut then would saved the family $125 a year. (There’s an additional “extra top tax,” as I call it, an income tax surcharge of 1 percent for millionaires from Proposition 63, to fund mental health care; the tax will continue.)

Let’s add it up: The middle-class family in the above examples will save $750 a year.

That’s not chump change. It could buy music lessons for a budding Mozart or Dylan. Or maybe needed roof repairs. It might be invested in a 401(k) to provide retirement security. Or it might provide seed money for a new business.

Positive Tax Cuts

“The tax cuts will definitely be positive,” Esmael Adibi told me; he’s director of the A. Gary Anderson Center for Economic Research at Chapman University. “The 1 percentage point sales-tax cut should induce buying. Although, at the beginning, people won’t notice it. But in the long run, some will think, ‘Maybe now I can afford that new car.’ There’s no question it will be positive. What many people forget is that, when you make something cheaper, people will buy more of it.”

The economy sure could use some help. Just last week, Chapman released its latest California Economic Forecast, which I attended in Costa Mesa. The Forecast foresees sluggish California growth, at best, with dropping housing prices the next two years. Some positive signs are increased exports to other countries and a positive attitude among most purchase managers.

But jobs growth will be sluggish.  California lost about 9 percent of its jobs during the 2007-09 recession – 1.4 million jobs. Every one with a face and a story to tell.

But jobs growth will be only 216,000 for 2011 and 290,000 for 2012, making up only about a third of the jobs lost.

One of the most important things about taxes is an intangible: What do people expect will happen next? The 2009 tax increase was signed into law by a Republican governor, Arnold Schwarzenegger, who had pledged in his 2003 race for governor not to increase taxes.

Attacking soon-to-be-recalled Gov. Davis’ car tax increase, Arnold said then, “All they have done is spend, spend, spend, and when they realize they spend money they don’t even have, then it is tax, tax, tax. How crazy is that going to be to come up with this crazy idea to raise the car tax by 300 percent? We’re not going to let it happen. Let me tell you something…. It’s going to hurt the person who is a low-income person who makes $15,000 to $20,000 a year. The person who is struggling to make ends meet. A person who is struggling to put food on the table for their family.”

He was right in 2003. And wrong in 2009. Perhaps he was distracted by the personal problems that boiled over in 2011.

In any case, the message from Arnold in 2009 was clear: Even Republicans support tax increases. There’s no refuge for taxpayers except to leave the state. Taxes might go up even more. His tax increases worsened the recession in California, hurting tens of thousands of people.

Late 1990s Economic Boom

Compare that with what happened when the last of Gov. Pete Wilson’s $7 billion in tax increases of 1991 finally expired in 1995. In 1994, state Sen. Rob Hurtt predicted that California, which was lagging the national recovery, would boom starting in 1995. He was right. The dot-com boom that ensued was undergirded by a rare California example of tax restraint. I recently tried to contact Hurtt, an Orange County businessman, for some perspective on the current situation, but his office said he no longer comments on politics.

The point is that the message in 1995 was clear: Taxes are going down. They’re not going back up, at least for a while. California is open for business again.

Today, if California Republicans in the Legislature have the guts to Stonewall any tax increases of any kind – from Gov. Jerry Brown, the Democratic Legislature, or the Man in the Moon – California’s economy will be given a shot of needed adrenaline. People and businesses will have more money to spend and invest. And the intangible message will be: Even when Democrats run everything, they can’t increase taxes.

Perhaps then we’ll begin to catch up with the national recovery. And if there’s the second dip of a double-dip recession, the last thing California wants to have is even higher taxes – and the reputation for continually increasing them.

I’m not going to light any fireworks until my tax cut is jingling in my pocket. But Republican steadfastness in protecting the July 1 tax cuts could make July 4 sparkle even brighter this year.