CRP Blog

Wednesday, April 1, 2009

The Sales Tax Hike and California's Competitiveness

Higher sales taxes went into effect today, making life in California even more expensive than it was already.

Californians were already the highest taxed people in the West, and this continues to place our state at a competitive disadvantage with other states, particularly our low tax neighbors of Arizona, Nevada, and Idaho.

I'm reminded of the news it made in San Diego when Buck Knives moved its operations out of El Cajon as a result of the crushing tax and regulatory burden California's "helpful" government imposed on the company. The Union-Tribune put it this way in a story written following the company's move:

This is Post Falls, the northern Idaho town where Chuck Buck and his son, C.J., moved their company just over a year ago after 38 years as an El Cajon mainstay.

The Bucks said it cost too much to make their rugged outdoor knives in California, and Idaho was all too happy to welcome them with financial incentives. Fifty-eight employees came along. About 200 others were laid off.

Local leaders considered Buck Knives' departure a visible blow to San Diego County's economic landscape and a symbol of the state's problems in attracting and keeping companies.

"I'm always sorry when I see a company leave the state, but I use the experience of Buck Knives to warn elected officials to pay attention to competitiveness issues," said Julie Meier Wright of the San Diego Regional Economic Development Corp.

Higher taxes enables more government spending, and therein lies California's perpetual problem. The Democrats in the legislature, with their "power of the purse," have consistently pushed to spend every last dime of tax revenue, borrowing even more, and insisting on higher taxes, all at the same time. In boom years, one-time revenues are too often used for ongoing programs, producing a shortfall when revenue declines in leaner years.

No business could survive if it managed its affairs the way the state of California does. The federal government is even worse, although it has the flexibility of not being required to balance its budget (it doesn't, by a long shot), and it can print money, which the state cannot do.

The higher tax revenues projected by government bureaucrats never produces the anticipated revenue, which worsens the problem. If these revenue forecasters were psychics at the county fair, they would be out of business. Standard-issue government forecasting models ignore or underestimate the impact taxes have on behavior. That is, assumptions are made that if an activity is taxed more (making it more expensive), people will engage in the same amount of that activity as before.

This creates an institutional bias in favor of higher taxes and against tax cuts because it overestimates the new revenues a tax hike will produce, while underestimating the increased economic activity produced by lower taxes.

For California, it means new taxes will likely fail to meet projections, producing yet another budget shortfall. Meanwhile, the state suffers because employers considering where to move or expand now see a state that is even more expensive to operate in.

The impact on individual families should not be overlooked, either. While the impact on the family budget may not be obvious from any single purchase, it's still there. Consider how much greater the outcry over this tax would be if people were required to submit a single check at the end of the year for their sales tax liability, instead of having it collected at the time of purchase.

Point-of-purchase sales tax collection, payroll deduction of income and other taxes, imposing taxes and fees on employers who have to pass those costs on, and other means of hiding the true cost of government doesn't make it cost less.

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