California Tax Hikes Helped Solve Budget Crisis with Minimal Impact on State’s Economy

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August 22, 2013; Washington Post, “WonkBlog”


The Washington Post’s Jim Tankersley points out in its WonkBlog that California has kept adding jobs, and at about the same rate as the nation overall, despite the fact that last November its voters imposed the highest state income tax rate in the nation, as well as hiking the sales tax. That result bears out the predictions of most economists that the tax hikes wouldn’t make much difference, and refutes the warnings of anti-tax conservatives.

Private-sector employment rose by 0.8 percent in California from January through July, while across the country, it rose 0.9 percent. Beacon Economics in Los Angeles noted that California accounted for a quarter of the nation’s job growth last month, and the State’s Department of Finance reported that there were 374,000 fewer unemployed Californians in June than there were a year earlier.

The income and sales tax increases were placed on the ballot by Governor Jerry Brown and the state legislature to staunch the hemorrhaging state budget and allow it to maintain basic support for education and other critical public services. Many of the Golden State’s nonprofits—including educational and job training organizations, social service providers and health clinics—rely heavily on state support for their projects and programs, either through grants or fees for services to state residents.

However, statistics show that though California’s unemployment rate remains higher, it has fallen faster than the national average since January, dropping a full percentage point. And the state’s job growth has slowed as compared to the same time last year. The bottom line is that eight months after raising sales and income taxes, California is still adding jobs on par with the rest of the nation, but not as fast as it added jobs up to this point a year ago. At one point in the Great Recession, California had the nation’s third-highest unemployment rate, and was hit especially hard in the southern half of the State.

Tankersley says that it remains too early to come to any conclusions about the degree to which tax hikes have slowed the state’s growth, quoting a senior economist at the UCLA Anderson Forecast, who said that “the data are not such that there is a discernible pattern in California distinct from the U.S.”—Larry Kaplan

  • Michael Khouw

    Today my two sons began their first day of public school in Austin, TX. My wife and I met in California 10 years ago, we were married 7 years ago, and wanted to raise our kids there too. Our decision to leave came last November with the tax hikes.

    Uprooting a family is not easy or undertaken lightly. Even though my business allows us to choose where we live, and even though our kids were both leaving their respective schools this year anyway, leaving our home and friends was heart wrenching. The lure of a “free” house, and a more highly ranked kindergarten with a 1/3 smaller class size than the “California Distinguished School” where we lived helped assuage only some of the pain. Many of those that wish to migrate for tax reasons may not be able to, at least not immediately. Suggesting that it is not happening however, or that the tax increases had no impact is disingenuous.

    Younger families in California often do not have the benefit of substantial unrealized capital gains created by owning a home for the past couple decades as prices appreciated sharply. Most do not have the benefit of low property taxes a much lower acquisition cost assessment provides courtesy of Prop 13. Proponents suggest this promotes stability in neighborhoods, and it does to a degree, as a large number of retirees still living next to a middle school our old neighborhood can attest. Does it promote a vibrant and sustainable neighborhood though? I agree people should not be taxed out of their homes, but neither should the the burden tax younger families so heavily that they cannot move in or thrive. What happens to the schools as the tax base doesn’t keep pace with the cost of providing good schools and other basic services?

    Sadly and reluctantly we realized that upper middle class professionals, particularly those that came to California within the last 10-15 years are being asked to pay an unfair burden, often to cover the expenses for the past we weren’t around for, even as services are cut in the present. This is not simply about taxes, it is about tax fairness. Texas sales taxes are only marginally lower than those in California after all, and property taxes are almost comparable too when adjusting for variables of both cost and rates. Advocates for increasing taxes in California, and at the Federal level, have somehow managed to discuss income and wealth as if they are the same thing. They are not.

    Although what follows isn’t our example, consider the following two households.

    Is a married couple living in the bay area with $250,000 in income, $150,000 in school loans, child care and $5,000/month rent and car payments wealthy? What about the retired couple next door who own their 1.5mm home outright, pay $2,500/yr in deductible property taxes, collect $3,000/mo in social security and another $6,000/mo in inflation adjusted pension? Compared to some both are wealthy, compared to others perhaps neither are, but compared to each other most would see the retired couple as wealthier, but the tax code, particularly in California doesn’t see it that way. What’s fair is in the eye of the beholder, but consider what kind of a society you want to live in more broadly, and recognize that the tax policies we put in place will influence what that society ultimately looks like, even if the move there is slow and subtle.