How taxes hurt state, and how system can be fixed 

There’s no doubt that California is struggling with unemployment, a sluggish economic recovery and increasing worker anxiety. As the stress of the April 15 tax deadline fades, it’s worthwhile to understand how tax policies in Sacramento are hurting a state the recession has hit particularly hard.

California’s 12.6 percent unemployment rate, slightly higher than last month, is tied for the third highest in the country and is the highest rate on record since 1976, when the Bureau of Labor Statistics standardized unemployment data. Even more disturbing is the severity of unemployment in the Golden State.

In 2009, jobless Californians were unemployed for 26.5 weeks, on average, the fifth-highest rate in the country. A staggering 34.9 percent of those were without work for more than 27 weeks, a commonly accepted measure of severe unemployment. Worse, nearly one in five (18 percent) unemployed workers experienced joblessness for more than a year.

Part of the economic malaise affecting is a function of the larger national recession. Public policies emanating from Sacramento, however, haven’t made things better.

There are two aspects to understanding taxes: burden and design. Both the size of the tax burden, along with how it’s imposed on citizens, have economic effects. The larger the burden, the larger the role the government plays in the economy compared to individuals and businesses when it comes to deciding priorities and allocating scarce resources. This is important since experience and history confirm that individuals and businesses make far better decisions about how best to allocate resources.

To measure the total burden of government, both state and local taxes, including current and deferred, must be included. Such a measure focuses on the real variable determining the burden of government: spending.

According to Census Bureau data, California had the fourth-highest burden of government in the country. Specifically, state and local spending represented 18.3 percent of the economy in 2007, the most recent year for which information is available. Californians can assess whether they have the fourth-best education, public safety, infrastructure, etc.

How those resources are extracted also matters. Some taxes impose much higher economic costs than others by altering incentives to work, save, invest and be entrepreneurial — the foundations of a prosperous society.

A significant portion of California’s economic problems are rooted in a heavy and poorly structured tax system. When the state tax burden is combined with its structure, it ranks a dismal 50th out of 50 states. Fortunately, the solution to these problems is straightforward.

First, California must reform the way it spends in order to spend less while providing better results. There are lessons across the country, and abroad, regarding how to achieve this goal.

Second, the state needs to reduce taxes and in particular it must reduce personal and corporate income taxes. Modernizing and reforming the state sales tax also would be good policy.

Such changes would allow for permanently lower taxes that improve incentives for work, savings, investment and entrepreneurship, coupled with better services. Such a combination is the recipe for a lasting return to economic prosperity in the Golden State.

Jason Clemens is the director of research at the Pacific Research Institute and co-author, along with Robert Murphy, Ph.D., of the recently released “Taxifornia” study (www.pacificresearch.org).

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Staff Report

Staff Report

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A daily newspaper covering San Francisco, San Mateo County and serving Alameda, Marin and Santa Clara counties.
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