CA admits higher taxes kill tax collection

Cagle Cartoon - crisisFeb. 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
Present “The American Exceptionalism Radio Talk Show”
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Click here to listen:  http://www.ustream.tv/channel/american-eceptionalism-news

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11 comments

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  1. Naresh Krishnamoorti
    Naresh Krishnamoorti 21 February, 2013, 11:41

    I think it’s unseemly for you to refer to Gov Perry as an opportunist. The term has negative connotations.

    Reply this comment
  2. The Modified Ted Steele Methodologies (tm)
    The Modified Ted Steele Methodologies (tm) 21 February, 2013, 12:16

    mmmmmm Naresh—– I like the cut of your jib….

    Reply this comment
  3. BigFire
    BigFire 21 February, 2013, 13:32

    No, opportunist is the right word. The smart one are opportunist at picking the moron’s misfortune. We have elected a Democratic legislature that can and will pass tax increase at will. And it’s our misfortune Perry is dining on.

    Reply this comment
  4. Sean Morham
    Sean Morham 21 February, 2013, 14:19

    The December sales tax proceeds may have had a bump because of the coming sales tax increase. It will be interesting( and a bit fun to us so cynical) how the Governor explains when the tax windfall is gone(spent) or disappears. Whatever one thinks of the Texas governor, he is sowing the crop..If and when California is scrambling on the budgets(in 2013?) his arguments about the state of California will lead to a lucrative harvest, weather or not.

    Reply this comment
  5. loufca
    loufca 21 February, 2013, 17:53

    Some day the voters in California will wake up. JB and his band make big promises but rarely deliver. They are usually late with budgets, are over optimistic on revenues and underestimate expenses. If you did this in business, you’d be out of business in a short period of time. I’m projecting a budget deficit, not a surplus, for FY 13-14.

    I remember JB back in the late 70’s. Bogus then and bogus now.

    Reply this comment
  6. Dave Lafferty
    Dave Lafferty 21 February, 2013, 18:32

    Loufca, I wish I could say I believe you’re right, but I’d be lying. Voters in CA will NEVER wake up. If they had that capacity, we wouldn’t have had a Demcratic majority (now super-majority) for 40+ years. CA will never have a clue as long as we continue to vote in the idiots with no sense of fiscal responsibility. Or as long as we continue to welcome in the illegal aliens (sorry…I meant to say “undocumented Democrats.”
    )

    Reply this comment
  7. Hondo
    Hondo 21 February, 2013, 18:47

    There will be no raises for the public employees. The state revenues will crash in April and May and come the June budget deadline, what will Moonbeam do. Walmart has already said Feb. revenues are a catastrophe.
    Math is hard. A hard mistress. There is no more money left to steal.
    Hondo…

    Reply this comment
  8. BobA
    BobA 21 February, 2013, 20:19

    Hondo:

    If I can take the liberty of extrapolating your comment out to it’s logical conclusion, another tax increase is looming on the horizon and probably already being contemplated by Gov. Moonbeam and the dems.

    The only questions are: a) what form will the tax increase take and b) how will they sell it to the low information voters this time around. The fact that California voters are going to buy another tax increase is a foregone conclusion. They almost always do. It will be the old canard of saving our schools or “it’s for the children” or some variation thereof.

    Reply this comment
  9. Rich Minnich
    Rich Minnich 22 February, 2013, 12:46

    Not to suggest that I disagree with your overall sentiment, I still need to make a small correction to your statement about the Laffer Curve.

    The Laffer curve does not suggest an inverse relationship between higher tax rates and higher revenues. What it does suggest is: that higher marginal tax rates will often NOT result in a linear increase in tax revenues, i.e. a 10% increase in the tax rate will not necessarily result in 10% additional revenues. Similarly, a 10% REDUCTION in marginal tax rates will not inevitably result in a 10% reduction in tax revenues. But the result depends on where current tax rates are on the the proverbial curve.

    As you stated, the Reagan tax rate reductions did not reduce tax revenues by what a static analysis would have predicted. And this was true when Kennedy reduced tax rates in the 1960’s, and when Collidge reduced rates in the 1920’s.
    And it is, almost without a doubt, true now… We need supply-side economic policies now more than ever!

    Reply this comment
  10. BobA
    BobA 24 February, 2013, 07:54

    FYI:

    I just read that there’s a meeting/vote next week to raise the state’s excise tax on gasoline to make up for the revenue shortfalls in gasoline tax.

    California already has some of the highest gas prices in the nation and the clowns running this state wants to push it higher. It seems seems that the people who run this state are indifferent to the economic burdens of higher gas prices as businesses pass those costs on to their customers.

    Reply this comment
  11. Hondo
    Hondo 25 February, 2013, 07:16

    Gas taxes are the most regressive taxes ever. For the working poor, who have to drive to work, they are a killer. For people like Jane Fonda, they are such a tiny part of their spending capacity, they have no economic meaning. But for the working poor, or a small business man, gas taxes are huge.
    Let me put it this way. Gas taxes are a drop kick in the nuts of the workin man.
    Hondo….

    Reply this comment

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