CA admits higher taxes kill tax collection

Feb. 21, 2013

By Chriss Street

Gov. Jerry Brown was just forced to admit reality. His supposed $5 billion boost in January tax collection from Proposition 30, which increased sales and income taxes, was really just an early collection of taxes.

Two weeks ago, California state revenues were up by $4.3 billion in January over Brown’s proposed 2013-14 budget proposal.  At the time, I said 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.

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 said 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 percent and capital gains taxes by 5 percent.

What Jerry Brown failed to admit was that sales taxes have crashed by 27 percent, or $582.7 million, as Prop. 30, Cap and Trade and other onerous regulations are finally beginning to convince the rich to take their businesses, income and shopping somewhere else. While at the same time, opportunists such as Texas Gov. Rick Perry have been attempting to lure corporations to leave the state.

And it now appears the sales tax collection crash in January is a precursor of an even bigger crash coming by April.  Brown made huge promises of payback for union bankrolling of Prop. 30.

The result: California is looking towards another crisis.

Reaganomics

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 that 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 — the first surplus in a decade.  I pointed out that Brown cited 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. The contracts are due to expire this summer.

Even though the average state worker’s 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 Prop. 30.  Brown has already promised to “restore” $817.6 million in pay in the current budget, offer $502.1 million of 2 percent to 5 percent pay raises next year and add coverage for higher health care costs.

He indicated executive branch salaries also will increase nearly 10 percent, to $15.7 billion.  None of these increases includes the $10 billion increase I estimate that is required to keep the current state pension system solvent.

The state of California is now facing an even bigger crisis than before the passage of Prop. 30.  It’s now feeling the economic impacts of the highest state sales tax at 7.5 (even higher in come counties), top income tax reate of 13.3 percent and second-highest gasoline tax at $.67 per gallon.

As was well publicized, Perry recently engaged in private meetings with business leaders in the San Francisco Bay Area and Los Angeles Basin to lure high-tech companies to the low-tax Lone Star State. 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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