Editor’s note: See correction at the bottom.

Toto, I have a feeling we’re not in Kansas anymore. We’re in California, where the winter weather is in the 70s and the high taxes are imposed by the Great and Powerful Oz.

Writing in Al Jazerra, David Cay Johnston said Kansas’ tax cuts hurt it, while California was helped by its $7 billion in tax increases, which voters approved with Proposition 30 in 2012. He is an investigative reporter, Pulitzer Prize winner and professor of business, tax and property law of the ancient world at the Syracuse University College of Law.

His headline: “Real world contradicts right-wing tax theories.” Subheadline: “California raised taxes, Kansas cut them. California did better.”

He wrote:

“Ever since economist Arthur Laffer drew his namesake curve on a napkin for two officials in President Richard Nixon’s administration four decades ago, we have been told that cutting tax rates spurs jobs and higher pay, while hiking taxes does the opposite.

“Now, thanks to recent tax cuts in Kansas and tax hikes in California, we have real-world tests of this idea. So far, the results do not support Laffer’s insistence that lower tax rates always result in more and better-paying jobs. In fact, Kansas’ tax cuts produced much slower job and wage growth than in California.

“The empirical evidence that the Laffer curve is not what its promoter insists joins other real-world experience undermining the widely held belief that minimum wage increases reduce employment and income.”

Let’s just deal with that.

First, as I seem to be the only one to have pointed out, California taxes actually have declined in recent years, not risen. I wrote in July:

“California taxes have dropped $6 billion in the last two years. That’s because Gov. Arnold Schwarzenegger’s record, $13 billion tax increase of 2009 expired and was replaced in 2012 by Gov. Jerry Brown’s $7 billion tax increase of Proposition 30.

“Net: a $6 billion tax cut.”

Now, guess what? The entire general-fund budget in 2013 for Kansas was $6.2 billion — roughly equal to the California tax cut.

So anything good Johnston says about tax policy in California has to be assigned to the tax cut here, not to an increase that didn’t happen.

‘Temporary tax’

True, from a Lafferite perspective, things would have been even better had Prop. 30 not passed. But in life, you take what you can get. And Gov. Jerry Brown, who campaigned for voters to pass Prop. 30, reminded us in October, “I said when I campaigned for Prop. 30 that it was a temporary tax, so that’s my belief, and I’m doing everything I can to live within our means.”

That’s highly encouraging to California businesses, which can look to an infusion of investments — Prop. 30 mainly is a tax on the wealthy — in a couple of years when the money is shifted back from the wasteful government sector to the productive private sector. Much more than government, businesses are forward looking.

If that happens, and Prop. 30 expires, taxes will have dropped $13 billion under Brown, the biggest tax cut of any state in history.

And if in 2016, Brown makes a fourth bid for president, all that will make for a compelling part of his “California is back [because of me]” narrative. Indeed, the Kansas governor’s own victory could put him in contention for the GOP nomination. How about a 2016 contest of Brown vs. Brownback?

By the way, it was Laffer who designed Brown’s supply-side, flat-tax proposal, a 13 percent income tax on everyone, during the governor’s 1992 presidential bid. So Brown, hardly the “right wing” partisan Johnston thinks goes for cutting tax rates, is well aware of supply-side economics.

Laffer also helped design California’s Proposition 13 tax cuts in 1978; and Ronald Reagan’s tax cuts that propelled more than two decades of strong American growth, until the unfortunate Bush-Obama policies of recent years. Laffer currently heads the Laffer Center for Supply Side Economics at the Pacific Research Institute, CalWatchDog.com’s parent think tank.

I recently reviewed, “The Pillars of Reaganomics: A Generation of Wisdom from Arthur Laffer and the Supply-Side Revolutionaries,” edited by Brian Domitrovic.

Supply-side

Johnston explained:

“Laffer’s model illustration looks like a bullet pointed to the right. It shows that the government collects no revenue when tax rates are at 0 or 100 percent. As tax rates rise, revenue does until reaching an unspecified rate that Laffer calls “prohibitive.” Above that level, as tax rates rise, government revenues fall off quickly.”

But this seems pretty obvious, doesn’t it? If the income tax were 100 percent, would you work? Of course not, except on the black market. What would be the point? (The Laffer Curve graphic he kindly linked to is from Laffer’s own site, and is reproduced nearby.)

Johnston wrote:

“Laffer qualifies many of his assertions about changes in tax rates, noting that tax cuts may result in less government revenue, for example.”

Right. As you move down the lower part of the Laffer Curve, the white area, both tax rates and revenues drop. Taxes at a 0 percent rate obviously raise 0 dollars. (Unless the good professor volunteers to send the treasury a check.)

Kansas vs. California

Johnston continued:

“But on one issue from the Laffer curve, he is absolute:

“Tax rate cuts will always lead to more growth, employment and income for citizens, which are desirable outcomes leading to greater prosperity and opportunity.”

This is where the Sunflower State vs. Golden State rivalry comes in, an economic version of the Kansas State Wildcats vs. the UCLA Bruins at the Valero Alamo Bowl on Jan. 2.

“Is this absolute rule right?” Johnston asked. “Let’s consider the tax law changes in Kansas and California that took effect at the start of last year [2013; although Prop. 30 actually was retroactive to Jan. 1, 2012].”

He recounted how Gov. Sam Brownback ran for office in 2010 “to turn the state into a low-tax paradise and eventually to eliminate the state income tax….The Brownback administration paid Laffer $75,000 for his advice on the tax cuts.” Effective in 2013, “The bottom rate was cut from 3.5 percent to 3 percent. The top rate, which starts at $15,000 of taxable income for singles, was lowered from 6.25 percent to 4.9 percent.”

Imagine that! A politician who actually kept the campaign promise under which people elected him. Indeed, Brownback last month was re-elected, despite concern that his tax cuts caused budget deficits. The Kansas City Star reported:

“After he addressed his supporters, Brownback told The Star he looked forward to the next four years.

“’We’ve done the hard things,’ he said. ‘Now we can do the things that we want to do. We can invest in education growth because we’ve made the tough decisions. Now we can work on issues like poverty and water because we’ve made the tough choices.’

Brownback also plans on reducing Kansas’ deficits by cutting waste, which as everywhere in government is larded as thick as on a holiday hog.

And with Brownback and his tax cuts now firmly entrenched, Kansas businesses can plan their prosperous futures. I suspect, just as Laffer’s theory predicts, the prosperity will increase the tax base, thus providing higher taxes which also will close the deficit.

“The same month the Kansas tax rate cuts began, tax rates rose in California,” Johnston wrote. But as we have seen, looked at in a slightly larger perspective, California’s taxes dropped $6 billion — which helped that other tax-cutting governor, Jerry Brown, also win re-election.

Bond rating

Johnston brought up state bonds:

“Moody’s Investors Service lowered the state’s credit rating after the $800 million of tax cuts took effect, a move Brownback dismissed as telling more about Moody’s policies than Kansas’ finances. Later Standard & Poor’s also downgraded Kansas bonds, citing ‘a structurally unbalanced budget,’ in which taxes were cut more than spending.”

He also could have cited how California’s bond rating was upgraded right after voters just passed Proposition 2, the “rainy day fund” initiative.

Except that, despite these changes, Kansas still has higher bond ratings. California’s S&P bond rating rose to “A-plus” from “A.” S&P defines that as, “Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.”

Kansas’ S&P rating, from the August downgrade, went to “AA-minus” from “AA.” S&P defines that as — note the lack of a cautionary note — “Very strong capacity to meet financial commitments.”

As to Moody’s, it rates California’s bonds “Aa3,” but Kansas’ higher, at “Aa2.” Both “Aa” ratings are defined as, “Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.”

On bonds, Johnston summarized, “California’s credit rating improved. The Golden State can borrow at lower rates, while Kansas will have to pay more to compensate investors for the risk that the Sunflower State will lack the revenue to repay its debts.”

Except that Kansas’ rates still are lower that California’s and it will “have to pay” less overall “to compensate investors.”

Jobs

Folks care most about jobs. Johnston compared the two states:

“From January 2013 through September 2014, the latest data, California grew jobs at 3.4 times the rate of Kansas. Total nonfarm payroll jobs in Kansas increased 2.1 percent, in California 7.2 percent.”

He provided a nice graph:

Except that, as of October this year, Kansas’ unemployment rate was just 4.4 percent, 10th best of all the states and D.C.; compared to 7.3 percent in California, 47th best (4th worst).

According to Businessweek, “In the U.S. a full-employment economy more realistically is closer to the 3 percent to 4 percent mark….”

So Kansas is close to “full employment.” Those without jobs basically are between jobs. Or looking for Dorothy.

Employment can’t go up faster because everybody already has jobs. It’s like when your teenage son stops growing at 18, you don’t complain that he doesn’t keep rising to 10-feet tall.

So for working stiffs in Kansas, the Laffer-Brownback tax cuts worked!

Compensation

One area Kansas seems to lag is in compensation. Johnston wrote, “Compensation in California also grew faster than in Kansas. California’s average weekly wage of $1,165 in the first quarter of this year was 13.4 percent higher than in mid-2012, while the Kansas average of $840 was up only 10.1 percent.”

Except that, for the second year in a row, according to the U.S. Census Bureau, California suffers the nation’s highest poverty rate when the cost of living in this incredibly expensive state is taken into account. Part of the reason is that California’s high taxes, with the shocking 9.3 percent income tax rate digging in at about $55,000 of earned income, also gouge the middle class.

A shocking 8.9 million of our 38 million residents languish in poverty, or 23.4. That 8.9 million is three times Kansas entire population of 2.9 million.

By contrast, just 11.8 percent of Kansans are in poverty, less than half California’s percentage.

Education

Taxes go somewhere. The biggest item in both states’ budgets is education. In California, we even have an initiative, Proposition 98, which mandates about 40 percent of general-fund taxes go to public schools. And the Prop. 30 tax increase largely was justified as benefiting K-12 school kids.

According to the National Assessment of Educational Progress, “In 2013, the average score of fourth-grade students in Kansas was 223. This was higher than the average score of 221 for public school students in the nation.” But just barely higher. It was middling, causing Brownback to seek further reforms.

NAEP found for California, “In 2013, the average score of fourth-grade students in California was 213.” That was 8 points below the national average of 221; and it was 10 points below Kansas’ 223 average.

So, for all California spends on education, and all the high taxes Johnston says benefit us, our kids’ score worse than in low-tax Kansas.

As EdSource reported of the 2013 scores:

“California students performed about the same in reading and math on this year’s National Assessment of Educational Progress as they did in 2011, ranking among the 10 lowest performing states in the country.

“Results from this year’s assessment show that only 33 percent of California 4^th grade students and 28 percent of 8^th graders are proficient or better in math. In reading, 27 percent of 4^th graders and 29 percent of  8^thgraders are proficient or better.”

Conclusion

I’ll skip Johnston’s discussion of minimum-wage boosts, which he thinks will help California. With the wage going up even further due to initiatives in four states and three California cities, and more to come in 2016, we’ll soon have some really good comparisons on that. (My earlier articles on it are listed here.)

But just one more thing, as the late Steve Jobs used to say. Johnston wrote, “Tax hikes did not hurt California job growth because the taxes were not on jobs but on high incomes.”

Once again — strike up the band — taxes have gotten lower in California. But as to the Prop. 30 income taxes only on “high incomes,” when “the rich” pay more in taxes, all of us suffer, too. Because it’s largely the rich who use their money to invest in creating new businesses and jobs, as well as fund numerous charities.

Johnston concluded:

“Ultimately, real world results trump theory. Actual changes in the number of jobs and what they pay should be used to set policy, not ideology, assumptions and expectations…. Time will tell. The important thing is that policy should follow the facts, no matter where they go.”

Yep.

Correction: This piece originally had Kansas’ Moody’s rating downgraded to Aa1; in it was fact one notch lower, at Aa2, to which the text has been changed. We regret the error. We were informed of this by David Jacobson, AVP, Communications Strategist-Public Finance Group at Moody’s Investors Service. He wrote, “In spring of this year we downgraded Kansas from Aa1 to Aa2, and in June we upgraded California from A1 to Aa3.  So the correct rating on Kansas is Aa2, and although the states are moving in different directions, Kansas does remain one notch higher than California.  Our median state rating is Aa1.”

Why then don’t Republican candidates just follow Ronald Reagan’s successful economic recipe from the 1980s? Cut taxes; in his case, from the top income tax rate of 70 percent in 1980 to 28 percent in 1988. Keep money stable to prevent inflation. Reduce spending and regulations as much as you can. Simple.

Yet not one Republican president or candidate for the office since then has followed the Reagan recipe. President George H.W. Bush sat next to Reagan as vice president for eight years, solemnly gave his “Read my lips: No new taxes!” pledge at the 1988 GOP National Convention — then still raised taxes, crashed the economy and was booted from office in favor of Bill Clinton.

His son, President George W. Bush, did cut taxes twice — but the tax cuts expired in 2010, he imposed more business regulations through Sarbanes-Oxley and he turned Clinton’s surpluses into record deficits.

If Republicans want to return to Reaganomics, prosperity and victory at the polls, they again should return to the Reagan recipe by studying the new book, “The Pillars of Reaganomics: A Generation of Wisdom from Arthur Laffer and the Supply-Side Revolutionaries,” edited by Brian Domitrovic.” It is published by the Laffer Center at the Pacific Research Institute, CalWatchDog.com’s parent think tank.

Laffer will be speaking about the book at Noon, Thursday, Oct. 16 at the Pacific Club, 4110 MacArthur Blvd., Newport Beach. Info here. Those attending will receive a free copy of “Pillars.”

In addition to being the major economist who helped fashion Reagan’s program, he helped design its precursor, California’s Proposition 13 tax cuts in 1978, as well as numerous other tax cuts for states, cities and foreign countries.

Laffer has been a sage source of mine since I came to California in 1987 to write editorials for the Orange County Register. A couple years ago he took his own advice and moved to Tennessee, which has no state income tax. I still can’t escape the beach.

What supply-side economics is

The first thing to understand about supply-side economics is that it is not designed to “put money in people’s pockets.” Yet that’s often how it’s described,

Rather, as its name indicates, supply-side economics emphasizes encouraging supply — that is, long-term production, doing stuff, making stuff; instead of demand — that is, buying stuff.

That’s why G.W. Bush’s early 2008 “stimulus” of $168 billion, which rebated up to $600 a person ($1,200 for a couple), didn’t prevent the economic crash that September and the subsequent Great Recession. It was a demand-side stimulus that had no long-term effect.

Supply takes place in the long term. It takes years to gear up producing such goods as cars, cell phones and equipment.

So just giving people a little more waking-around money — demand-side thinking — does nothing to encourage production, and so nothing to help the economy. Demand-side thinking usually comes from the Keynesianism most people learned in college in Econ. 101. But impoverished Haiti has plenty of demands; what it lacks is production. Conversely, Switzerland is rich because it produces — it supplies — at the highest level in the world. Not surprisingly, Haiti is a morass of high taxes and regulations, whereas Switzerland is a Lafferite free-market paradise.

Laffer Curve

That’s where the famous Laffer Curve comes in. In the book, Domitrovic describes it:

“The Laffer Curve is a simple theoretical diagram, a bell curve…that compares tax revenues that are gained under all tax rates between 0 percent and 100 percent. At one end (the 0 percent tax rate), tax revenues are zero, at at the other (the 100 percent rate), tax revenues are also zero, because no one chooses to earn money when the government confiscates every penny. In between there is a bulge. And at one point, that bulge peaks — implying that any tax rate increase beyond it will result in lower revenue….

“Laffer…had used the curve often in the classroom, as a teaching tool. Then in December 1974, he sketched the curve on the restaurant napkin before two high staffers of the Gerald Ford administration, Donald Rumsfeld and Richard B. Cheney, along with his friend, Wall Street Journal editorialist Jude Wanniski.”

Alas, Ford did not embrace supply-side tax cuts, the economy continued to stagnate and in 1976, voters canned him for Jimmy Carter.

Laffer himself notes others before him said something similar. The earliest apparently was 14th century philosopher and sociologist Ibn Khaldun, who wrote in words Reagan sometimes quoted:

“It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.”

What Laffer invented was the graph that dramatically shows how the Laffer Curve works.

Laffer also details two previous supply-side tax cuts that boosted the economy. The first was by presidents Warren G. Harding and Calvin Coolidge in the 1920s, when the top federal income tax rate dropped to 25 percent from 77 percent. The second was by presidents John F. Kennedy, who touted them before his 1963 assassination, and President Lyndon B. Johnson, who signed the tax-cuts into law in 1964. Yes, Democrats can cut taxes, too.

Basically, the Laffer Curve is just common sense. If you tax something at 100 percent, nobody will pay the tax. If you tax something at 0 percent, no tax will be collected. The art of the Laffer Curve is finding the right recipe in between — that is, 1 percent to 99 percent tax rates — that maximizes both economic growth and tax revenues.

LBJ-JFK tax cuts

The LBJ-JFK tax cuts, and how they were enacted, are described in detail in the fourth volume of Robert Caro’s magisterial biography of LBJ, “The Passage of Power: The Years of Lyndon Johnson.” Unfortunately, Caro, although brilliant on the biographical and political aspects, doesn’t “get” why supply-side economics works, or the connection to Reagan’s tax cuts.

Here’s Laffer’s explanation:

“The 1964 tax cut reduced the top marginal personal income tax rate from 91 percent [!] to 70 percent by 1965. The cut reduced lower-bracket rates as well. In the four years prior to the 1965 tax-rate cuts, federal government income tax revenue, adjusted for inflation, had increased at an average annual rate of 2.1 percent, while total government income tax revenue (federal plus state and local) had increased 2.6 percent per year. In the four years following the tax cut these two measures or revenue growth rose to 8.6 percent and 9.0 percent, respectively. Government income tax revenue not only increased in the years following the tax cut, it increased at a much faster rate in spite of the tax cuts.

“The Kennedy tax cut set the example that Reagan would follow some 17 years later. By increasing incentives to work, produce and invest, real GDP growth increased in the years following the tax cuts, more people worked and the tax base expanded. Additionally, the expenditure side of the budget benefited as well because the unemployment rate was significantly reduced.”

And click this audio YouTube for JFK’s own 1962 explanation of his tax cuts.

Reagan deficits

Didn’t Reagan’s tax cuts increase the deficits? Yes, but the economy grew even faster than the deficits; and in his eight years in office, federal revenues actually increased 75 percent — from $517 billion in 1980, the year he was elected, to $909.2 billion in 1988, his last year in office. (See p. 24 here for this and the data below.) It’s like taking out a higher mortgage on a newer home after getting a raise.

Moreover, Reagan’s deficits came about for one reason: He was increasing defense spending to break the back of the demonic Soviet Union. It was a one-time deal. It worked when the Berlin Wall fell in 1989, a couple months after the Gipper left office. The deficits also were dropping fast, from $221 billion in 1986, to $150 billion in 1987 and $155 billion in 1988.

The reverse side of the Laffer Curve — that tax increases often make things worse — also was proven when Reaganomics was abandoned by President Bush with his 1990 “read my lips” tax increases. Instead of the deficits going down, the Bush tax-increase recession zoomed them back up — doubling to $289 billion in 1992.

What about the Clinton boom of the late 1990s? Didn’t he increase taxes in 1993? Yep. But after the Gingrich Republican Congress was elected in 1994, Clinton worked with the GOP to sharply cut capital gains tax cuts. It was Reaganomics with an Arkansas accent.

Gold standard

People sometimes say I write too much on the importance of the gold standard to stabilized money. But it is important as the means to stabilize the dollar and prevent inflation. Briefly…

The book includes a Laffer essay from 1980, “The Case for a Gold-Backed Dollar,” that resonates just as much today. Reagan, and especially Paul Volcker, the chairman of the Federal Reserve Board at the time and a Democrat, actually took Laffer’s advice and pegged the dollar to about $350 an ounce. That policy continued after Alan Greenspan became Fed honcho in 1987, until 2001. Unfortunately, after 9/11, Greenspan inflated the dollar, a policy continued under his successor, Ben Bernanke, driving gold up to as high as $1,800 an ounce.

Wonder why prices are rising? That’s it. Inflation takes about 15 years to work through the economy.

In 2012, Bernanke began stabilizing the dollar again at about $1,200 an ounce, a policy Janet Yellen, who became Fed chairman this year, has continued — a positive, Lafferite development.

“A properly designed program should have as its initial goal the stabilization of prices generally at or near their current level,” Laffer wrote in 1980. “Stated simply, a workable system of gold/dollar convertibility must not permit the economy to experience wrenching adjustments because of changes in gold….

“Based upon his posturing since the late 1960s it is, in my opinion, quite conceivable that Volcker could actually lead the search for a new order.”

That’s just what happened.

Back to Reagan

I highlighted Laffer’s writing. But “Pillars” also includes contributions by the late Warren Brookes, George Gilder, Charles W. Kadlec, Stuart J. Sweet, David Booth, Jeffrey Thompson and Reagan administration economist Bruce Bartlett.

When you remove the dustjacket, the book cover shows a good-as-gold engraving of Reagan holding a drawing of the Laffer Curve. My iPhone snapshot is nearby.  In these digital days, it’s still great to read a beautifully crafted physical book — 1980s style.

In conclusion, if Republicans finally want to get their act together and start not just winning elections, but governing for prosperity, they should start with this book. The Reagan prosperity recipe worked — and can work again.

It is easily demonstrated that in some cases, no, revenue wasn’t depressed by a tax hike. Marginal increases in state sales taxes aren’t generally driving revenue decreases.

But it is also easily demonstrated with some other higher taxes that individuals and businesses do in fact respond with changes in behavior that decrease economic activity.

Incentives drive behavior

It appears a ballyhooed 2012 ballot measure closing a supposed corporate tax ‘loophole’ falls in the latter category. This is from Cabinet Report:

“Proposition 39 or the California Clean Energy Jobs Act changed a corporate tax law to require multi-state or out-of-state businesses to source their sales of services and intangibles to the state where they were sold, rather than the state where the majority of work to produce them was performed. As a result, supporters of the plan expected that California – the nation’s biggest consumer – would see a big uptick in revenues. …

“Anti-tax advocates have long argued that imposing new taxes on businesses and higher wage earners hurts California in the long run because those targeted adjust their practices or relocate to avoid paying more. … It is an issue that the Brown administration is reportedly keeping a close eye on because of the income tax hike another November measure – Proposition 30 – imposed on the state’s top earners.

“Proposition 39 was aimed at corporate taxes, but some of the same issues are at work.

“Based on 2010 income tax data, the Brown administration estimated that Proposition 39 would bring in $928 million in 2013-14 and nearly $1 billion annually the next four years. But 2011 data showing a drop in those revenues forced the governor to revise Prop. 39 figures downward to $675 million in the current year and $726 million in 2014-15 budget.”

Runner is right

Cabinet Report puts this in perspective by talking to former state Sen. George Runner, who’s now on the Board of Equalization:

“We do a terrible job in all of our estimating of doing any kind of dynamic analysis that takes into consideration what the behavior of a taxpayer’s going to be. … One of the issues I always keep telling people is that tax policy changes behavior, and as a result of that, often times you’ll find government over estimates what it is that revenues are going to be because they forgot to or they can’t, sometimes, take into consideration the behavior of the taxpayer.”

Or maybe it’s that they refuse to “take into consideration the behavior of the taxpayer.”

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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