A California Republican

Fiscal conservatives in
California are appalled. It is not a new feeling for us, but this time around it is certainly stronger than at other points. Gov. Arnold Schwarzenegger is proposing an all-out assault on taxpayers in his Special Session. Activists and elected leaders (the Republicans at leas) have responded negatively, sometimes with laughter and some expletives.I don’t know why he thinks this Special Session is going to be different from the fate of his budget proposal. He couldn’t find anyone to carry his budget proposal – from either party. It was the same mix of cuts and revenue enhancements that his proposed “solution” to the current budget gap contains.But there is another issue in his assault on tax payers: his proposal to expand the sales tax to include a number of services has another problem: As currently outlined, it might be illegal.But first, let’s examine the policy of raising taxes on people and services. In a recession. First, as students of
California history know, tax increases don’t always raise revenue. (See Wilson tax hike, circa 1991). It would be shame to slam
California with a sales tax hike. A sale’s tax hike only success would likely be in suppressing Christmas shopping without raising any significant revenue, or worse, that it actually results in less revenue. Yes, tax hikes do hurt the economy.Second, temporary taxes aren’t temporary. Like unicorns, flying horses, and Bigfoot, temporary tax hikes are mythical creatures. The government doesn’t raise money only to part with it again. That will happen when pigs fly. Permanent tax hikes are all too real, even if originally sold as their imaginary counterparts – the temporary tax hike. Do the Governor and other liberal Democrats really believe that the tax-and-spend lobby (Democrats and their major constitutants) will let the sales tax increase expire in three years without a fight? We can see the CTA multi-million dollar campaign now: It’s for the children; it’s just an extension of an existing tax, you heartless puppy-kickers. Not to mention the labor unions’ involvement: you are hiking taxes so hike our pay respectively. Which will then demolish any additional revenues the state would’ve gotten from the “temporary” sales tax hike.Lastly,
California is in competition with other states and other nations for businesses. Low tax states have received a disproportionate share of economic growth in the last decade to the detriment of high tax states. Does this make sense – yes. So where should we be? On the low tax end hopefully. Which is where we are for
Hollywood with all their breaks, but not for anyone else. And
Hollywood funds Democrats campaigns – surprise.Why is this policy debate important right now? Well, this recession isn’t going to last forever. Recessions are cyclical, and when the housing market stabilizes, and people learn to behave responsibly with their money and the money of others, we will come out of the recession. As the nation emerges from the economic slump, businesses will have new opportunities to relocate and expand. Where will the bulk of the renewed economic activity take place? Business friendly states like Nevada, Utah, Texas or
Florida? Or
California, which ranks 47th out of 50 in business tax climate according the Tax Foundation? If you were a business – where would you want to be? I want my business to be somewhere I can earn a profit – and a state with high taxes is not that place.Now, the legal problem. There is no doubt as to the legality of tax increases at the state level as long as those increases receive a two-thirds vote of each legislative house. But the Governor proposes to extend the sales tax to services.The state might lack the constitutional authority to do expand taxes to services. Proposition 218 (1996), provides stringent voter approval requirements for taxes at the local level. The state may be able to impose a sales tax on services for only that portion of the sales tax going to the state — which the Governor want to raise from 5% to 6.5% — but the local governments receive about 2.5% called the Bradley-Burns tax, along with some other local add-ons from any amount of sales tax. So if the Governor simply raises the sales tax, he is also increasing taxes at the local level because locals receive tax revenue from the sales tax.In order to raise taxes at the local level, the taxes need to be voted on by the local communities – which are unlikely to agree to tax themselves. This means that there would have to be a two-level tax system in order to separate state sale’s tax from local sales tax.

I am not saying this couldn’t happen – but it is extremely unlikely.

So in addition to having policy concerns about the raise in sales tax, there are some legal concerns too.

Anyways – you only raise taxes if you think there is a revenue problem – and I happen to think it is an expenditure problem, not a revenue problem.