The half-percent solution to California budget woes 

Call it the half-percent solution. While they differ — a lot — in details, there is one fairly consistent theme in the competing proposals to raise Californians’ taxes: They assume increases in the range of $6 billion to $10 billion per year.

That’s roughly one-half of 1 percent of Californians’ personal incomes, or 8 to 11 percent of the increases in those incomes that state officials project are occurring this year as the economy slowly pulls itself out of the worst recession since the Great Depression.

It’s highly unlikely that a tax increase of those modest dimensions would have any appreciable economic effect, such as retarding recovery.

Indeed, since the money would just continue to circulate in the economy, albeit through state and local government and school spending rather than through private spending or investments, it probably would have no net impact.



That’s not an argument either for or against hiking taxes, but rather the simple fact of the matter.

And it’s important to keep that context in mind, because those who will campaign for tax increases next year will claim some hugely beneficial economic impact, while those who oppose them will contend that enactment would be economic ruination.

What we don’t know, however, is whether raising taxes even by a relatively small amount would have a major negative impact on California’s economic future.

We do know that the state was hit particularly hard by the housing industry meltdown and has been plagued with the nation’s second highest unemployment rate.

We do know that it will take massive private-sector investment to create enough employment to restore the million-plus jobs that have been lost since recession hit — not even counting jobs for another million who were already unemployed.

We do know that a negative factor in attracting that investment is the state’s suspect business climate, including a dense regulatory structure, poorly performing public schools, traffic congestion, an uncertain water supply and, yes, a relatively high tax burden.

But we also know that fixing some of those deficiencies, such as transportation and education, requires spending more public money that would have to come from taxes, one way or the other, probably tens of billions of dollars. And a tax increase in the $6 billion to $10 billion range would merely restore some services to pre-recession levels, not be a big fix.

California has a state and local tax burden that’s the fifth highest in the nation, about 9.5 percent of personal income. The pending tax increase proposals — we don’t know how many will actually go before voters next year — would raise that to roughly 10 percent.

Would that be a major factor in discouraging much-needed job-creating investment, or would cuts to education and other public services be even more negative factors? And, truly, are there any objective answers to those questions?

Dan Walters’ Sacramento Bee columns on state politics are syndicated by the Scripps Howard News Service.

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Dan Walters

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