California’s legislative analyst is proposing a 5% income tax hike in addition to the Governor’s proposed 1.5% sales tax increase. California already has the nation’s second-highest state income tax (9.3%, just short of Vermont’s 9.5%) and the nation’s highest sales tax rate (7.25%).
Other states somehow manage to provide an appropriate level of government services without a 14.3% income tax and an 8.75% sales tax. Why can’t we?
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Illegal immigration?
i think it just goes with the territory of a populous state. everything becomes that much more complicated, and the level of services required becomes that much larger, once you’ve got so many big cities running around.
California is already taxed more heavily than other large states, and apparently it’s nowhere near enough. There has to be something wrong with the state’s spending, and the size and complexity of the state doesn’t explain all of it.
It’s a Blue State. That’s how it works.
Zach –
Well, Ceteris paribus, A populous state (meaning more taxpayers and a more robust economy) should be able to meet the increased demands of a higher-density populace with the same (or lower) tax rate.
But, all things are not equal, and it is a blue state. Where things like teachers’ Unions demand no accountability which strain the budget. Kinda like we have up here in Oregon (a state with much lower density) and we are always having the government come to us demanding cash.
Back during the recall I read the California state budget and if you check it out the answer to your question is quite clear:Â California’s state payroll is unsustainably high.
The additional answer is Prop. 13.
Blue state governments (and county and city governments) find it exceptionally difficult to say No to requests to fund services. Consequently, costs go up. Rather than going bankrupt, those entities will raise taxes.
They will continue to raise taxes until those from whom they extract taxes say ‘enough’ and vote with their feet. After enough companies decide that Idaho or Nevada offers a better place to do business, and after further tax increases start pushing individual taxpayers across the border, the State of CA will discover that those who do not earn incomes cannot pay taxes to support all those services.
Then and only then will taxes come down.
I’ve seen calculations showing that after the tax increases now under discussion come into effect, businesses will be facing a 55% overall tax. With that kind of levy, it makes sense to move just about anywhere else.
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As the others have said. It’s the bluest of blue states. That’s what blue state politics does.
As this country is about to find out on a vastly larger scale.
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I’d like to point out an inconvenient fact for a lot of capitalist/free market/low tax advocates: the wealthiest states with the best standards of living in the nation all generally have the highest levels of taxation. If they’re so horribly socialist and so horribly oppressive to business, then why do so many people choose to live there and why do businesses tend to thrive there? The most obvious examples are California and New York, but Massachussetts is one of the wealthiest and most prosperous and most tax-happy states in the union. Meanwhile, numerous states with very low taxes languish with sluggish economies. Then there’s the likes of Alaska, a Republican haven I might add, where the government actually owns a piece of the oil industry and every citizen, in populist-socialist fashion, gets a check every year of oil money just for being a citizen of the state and as a benefit for allowing their oil to be sold. Pure socialism, no?
My point is not that high taxes = wonderful economies, but at some point a lot of us (including a lot of us who often have voted Republican) wonder at the level of obsession over taxes by some Republicans/Conervatives/Libertarians/whatever and ask: so if all those tax-high states are so awful, how come so many of them are so rich, and still getting richer?
Could it be that the government really does have a role in a functioning economy, and that providing infrastucture and other high-level services actually can help an economy and aid prosperity? Is that such an unthinkable thought, or do you have to be a Marxist to think that way?
I even remember the state of Illinois, where I lived the longest. Most of the state is fairly poverty ridden or at least mediocre. Where is the prosperity highest? Why, dense urban Chicago, which offers a massive array of public services and higher taxes than anywhere in the state. If you want to get rich, you hightail it to Chicago, and even if you’re in one of the wealthy nearby suburbs you pay some taxes to Chicago and receive some Chicago city services anyway. Especially if you’re in massive Cook County, which has been one of the bluest of the blue parts of the United States for decades.
And it’s neither a hellhole nor a rapidly deteriorating waste of rotting socialism, with the bodies of eviscerated businesses lying all over the streets. Amazing.
You know, I’m sympathetic to not raising taxes, but c’mon. Do the taxes you pay equal out or improve the improvements you see to your standard of living? Isn’t that the actual practical question?
Note: Texas also does very well, and is quite low-tax. So once again, no, high taxes don’t equate to great economies. I’m just sayin’….
Dean: my interpretation is that the economy comes first and then the taxes. (see Manhattan and Chicago)
Basically, the larger economies that have other things going for them can sustain higher tax rates for longer, but eventually taxes get high enough that it kills the economy.Â
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Democratic machine politics run California. The Legislature is gerry-mandered to ensure party victory. The result is massive spending programs (some good and necessary, but massive nonetheless). The consequence is massive deficits.
The proposed solution is higher taxes.
HB
I just worked up a spreadsheet to see if there were a correlation between combined state-and-local tax burden and per-capita income. (raw data)
Turns out there is a very slight positive correlation, but the R^2 is absolutely terrible (0.0367), and looking at the scatter plot shows what appears to be a random lump with no clear trend. It looks like a coincidence to me.
The flip side of this interpretation is that low taxes aren’t a clear route to prosperity, either. It appears from the data available that within the range of current state tax burdens, neither the deadweight loss due to taxation nor a lack of government services is a crushing burden on the economy.
As for Jodyneel’s hypothesis, a big reason why the New York metropolitan area has such a great economy is that they’ve got one of the best natural harbors in the western hemisphere at the nexus of several navigable rivers that lead into long-standing manufacturing regions, and thus have been a center of trade for centuries. Remove the three states spanning the NY area (New York, New Jersey, and Connecticut), and the correlation reverses itself. The high tax rate there is effectively a rent charged for the use of the harbor and the rivers.
Eric:
In physics we learned to look at the end points of a function as a guide to how the function trended. If you do that it is clear that both end points of taxation are dysfunctional, in other words zero taxes means no government and no infrastructure, while 100% taxes means no profit and no incentive to do business.
So clearly a modern society needs to have SOME taxes to provide the fundamental services that a society needs to survive.
From what I’ve seen the range of taxation that is "survivable" is surprisingly large. In this country most of us are taxed at or above the 50% rate already when you take into account all taxes we pay. Some states might be near 70%.
So this whole conversation clearly is one about the margins and the difference between an economy that is thriving and one that is struggling.
Dean’s point is valid, there are more forces at play in the overall economic picture than simply what level of taxes are paid by a state. And as Clinton proved in the 90s, you can raise taxes without crippling the economy.
That’s why these discussions tend to become about political ideology instead of raw facts. The facts can be viewed many different ways.
My ideology tends towards lower taxes, but not so low that the infrastructure crumbles. Where the optimal range of taxes is for a particular community is probably based on so many variables that it is not practical to try to calculate them, and some of those variables are probably not quantifiable anyway (such as how much more desirable it is to live in Southern California than Northern Alaska).
Whether this tax hike in California would actually cripple the economy is debatable. But the real question right now is not so much whether a healthy economy could withstand such a tax increase, but whether a weakened one can. Personally I don’t think I’d take the risk right now, but that’s just me.
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I lived in Texas for nine years. No income tax = awesome. Property taxes, however… I think it all averages out.
I spceulat ethat cities are engines of prosperity because they do require a higher tax burden to simply operate. It takes "energy" to have that many people live that close to each other, and that proximity is what drives the money. Its like a ferrari vs a Toyota Echo – one takes premium fuel, and measures mileage in gpm not mpg, but it goes fast. Really fast. The other one works just fine to go to the corner store and back but its not something you want to pick up girls in.
The prosperity comers from human enterprise, and entrepeneurship. Thats why London, Paris, Hong Kong.. all great cities of the world are where the richest people are. That human energy however cant be sustained without a massive investment in services and infrastructure. Ditto fo rincreased regulation, restrictions on rights of gnun ownbership, etc. You need all that to make it work, or it tears itself apart, or dies off.
I get what you’re saying, CC, and I agree with it. I did say specifically "within the range of current state tax burdens". The proposed California tax increases would make California a major outlier in tax burden, which means that data set is not a good guide to the economic impact of the tax increase.
My point in citing the data was to contradict Dean’s argument that bigger state governments had a measurable positive impact on the economy.
I live in California and absolutely do not relish the idea of a 5% tax increase. Regardless of the effect on the economy (and I don’t think it would be good), the personal freedom argument (let me decide how to spend my income, not Washington or Sacramento) is enough to make me prefer the lowest practical tax burden.
Then there’s the likes of Alaska, a Republican haven I might add, where the government actually owns a piece of the oil industry and every citizen, in populist-socialist fashion, gets a check every year of oil money just for being a citizen of the state and as a benefit for allowing their oil to be sold. Pure socialism, no?
No Dean. Not socialism. They are sending checks to the owners.
My point is not that high taxes = wonderful economies, but at some point a lot of us (including a lot of us who often have voted Republican) wonder at the level of obsession over taxes by some Republicans/Conervatives/Libertarians/whatever and ask: so if all those tax-high states are so awful, how come so many of them are so rich, and still getting richer?
Dean, your presumption is wrong that the wonderful economies and wealth is due to higher taxes. Your putting the horse before the cart. Wealth and great economies are due to a larger (lots higher) percaptia income in blue states. It is also true that the large metropolitan cities are in blue states. The cost of living is also higher (by quite a bit) than in red states.
Why do he blue states with large old cities have so much wealth? Mostly because they are the oldest cities in America that formed the hubs between railroads and harbors. And the oldest cultural institutions: stuff like universities, publishing companies, museums, corporate headquarters, stock and bond markets etc.
In other words if you want to make it big in the world, you need to leave a red state and goto the a blue state. Yes they are taxed more, but only because, for the most part, people have more wealth.
Sandi: "All the people are the owners" is exactly what the Marxists believed was true of all important resources. It’s what the Communists still believe. It’s also to a large extent what fascists–who are just nationalist socialists–believe about most important resources. It’s also what non-violent Democratic Socialists believe all over Europe.
Alaska’s most important resource is its fossil fuels. And all the people are its owners. This is different how exactly?
As for my presumption being wrong: I suggested no such presumption. I support no such presumption. I merely asked a few simple questions about government being a part of a functioning economic system, and whether taxes are really the most important question as opposed to things like sensible regulatory policy and truly functional and useful infrastructure. There isn’t a business anywhere in this country that doesn’t rely on government infrastructure for something or other, but an awful lot of businesses in high tax areas with lots and lots of infrastructure, support, and regulation are doing pretty damned well–undeniably so. And that’s been true for generations, and isn’t changing all that rapidly that I’ve seen.
If Massachussetts (or "taxachussetts" as some like to call it) is such a hellhole of oppression due to having the highest taxes in the nation (or damn near to them), how on Earth do they still manage to be a thriving center of commerce and incredibly wealthy to boot? If taxes are so bloody important, and low taxes are such a powerful stimulus and high taxes are such a horrifyingly bad drag I mean?
Shouldn’t the real question be what people and businesses are getting for their money, and whether it’s worth it?
So my question might be brought back to Eric’s original topic: so what if California gets a 1-7% tax increase? Your average business wouldn’t freak to see that level of rent increase probably. It might not even notice.
Shouldn’t the real question be whether California’s government services and infrastructure be improved in any way by such a move? I express skepticism at the notion that the answer is axiomatically "no."
My apologies on guessing your presumptions Dean, I guess I read your post too quickly. I suppose we are looking at the same thing from different angels.
On the Alaskan oil I look at government land as being the peoples land. That is different than the government owning everyone’s personal land.
Shouldn’t the real question be whether California’s government services and infrastructure be improved in any way by such a move? I express skepticism at the notion that the answer is axiomatically "no."
Yes however isn’t that an over simplification of the question? California is number 8 in per capita income. Three top states that rank higher in per capita income, are $8000-$13000 higher.
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Not only that, but I’ll bet California income is also more unbalanced. That is to say that California probably has a higher percentage of people below the percapita income than say.. Connecticut, New Jersey or Massachusetts.
I also don’t think California would need a tax increase if they didn’t have a large illegal immigration problem.
Dean, you’re looking at things as though taxes and expenditures were the only factors and they aren’t. There’s also borrowing to take into account and California’s fiscal imprudence has progressively made it more difficult to borrow.Â
There will come a point when borrowing is so expensive it’s not really an option but California’s commitments on the expenditure side of the ledger will remain. At that point all expenditures will need to be matched with tax increases or a federal bailout.
Not like a smooth curve but like falling off a cliff.
I’m not a minarchist or an extreme libertarian. I’m fine with people in a state voting to spend whatever they care to as long as their expense stream remains proportional to their revenue stream. California is overly dependent on the highest income earners for revenue and, well, they’re mobile and are increasingly moving to greener pastures.
Cook County, where I live, has also reached the point at which the expense stream has outstripped any conceivable revenue stream. The only solution to that is cutting costs which means cutting payrolls either by cutting salaries or by firing employees.  I’ve long advocated that costs be cut by cutting salaries for all non-union employees starting with the highest paid. I have no hopes that will come to pass.
Taxes are higher in prosperous cities for the same reason that Willie Sutton robbed banks — That’s where the money is. You find more fleas on a golden retriever than on a toy terrier. The golden retriever isn’t big because of the fleas.
Dean,
I think a lot of the effect of higher taxes depends on what they’re for. If the higher taxes are there to cover generous pension plans for people who retired at 60, it would seem a little odd if the net result was more roads in better repair.
With the proposed tax increase, my total marginal tax rate (including sales tax on my spending and the employer share of my payroll tax, but excluding the federal deduction for state income tax)Â would be 57.6%. I don’t think I’m getting quite enough government services to make up for that, and that’s quite enough for me to notice and to disincentivize my productivity.
Dean, you’re right that the fundamental question is whether the services are worth the taxes. What I’m questioning is why California feels it needs so much more government services per capita than any other state in the Union. The answer that every other state is undertaxed and underserviced strikes me as unlikely.
I should also note that despite Massachusetts’s reputation, it’s not a particularly high-tax state. The national average state-and-local tax burden is 9.7% of income, and the tax burden in Massachusetts is 9.5%.
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