Joel Kotkin at Forbes wonders what killed California’s economy:
It took some amazing incompetence to toss this best-endowed of places down into the dustbin of history. Yet conventional wisdom views the crisis largely as a legacy of Proposition 13, which in effect capped only taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es.
This lets too many malefactors off the hook.[…] To the surprise of many prognosticators, the state government did not go out of business. It has continued to expand faster than either its income or population. Between 2003 and 2007, spending grew 31%, compared with a 5% population increase. Today the overall tax burden as percent of state income, according to the Tax Foundation, has risen to the sixth-highest in the nation.
See our State-Local Tax Burdens rankings here. That California remains one of the highest-tax states in the country is a crucial point undermining the “Proposition 13 caused it all” thesis. That and a time lag of several decades. Other than property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es, essentially every other California tax is among the highest of the states.
California is a high tax state. They are sixth highest in state-local tax burden as a percentage of state income. The sales tax is the highest state rate in the country even before the recent 1% increase, and numerous county rates keep them in the top 5 of state-local combined rates. Their individual income tax top rate is the second highest in the country, eclipsed only recently by Hawaii, and is sixth highest in the country in terms of collections. The corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. is one of the highest in the country and sixth highest per capita in collections. Even the gas tax is the third highest in the country and the state Lottery has the fifth highest implicit tax rate in the country. Only on property taxes is California “low”: 28th highest in collections per capita.
The Tax Foundation’s annual State Business Tax Climate Index evaluates tax structures for business-friendliness, and the 2009 edition ranked California 48th, or third worst. The individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. ranked second to last, corporate income tax ranked 45th, and sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. ranked 43rd. (Property tax structure was a bright spot, ranking 15th in the country.)
With these comparisons, and the enormous growth in state spending, it’s hard to say that California’s problem is insufficient taxation. Ultimately, California voters need to decide whether they are willing to pay the taxes to fund the programs they want. The tax system prevents this from happening now, due to the state’s overreliance on taxing capital gains, corporations, and high-income earners. Most Californians rightly think additional spending is a free lunch that they won’t have to pay for.
Read more Tax Foundation research and analysis on California here.
Read the rest of the Forbes piece here.
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