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Reason Foundation

Out of Control Policy Blog

Reform California’s Tax System to Boost Economy

Adam Summers
February 13, 2013, 6:26pm

In my most recent policy study, co-published by Reason Foundation and the Howard Jarvis Taxpayer Foundation, I analyze what I consider to be some of the more egregious special-interest corporate and sales and use tax carve-outs in California and argue that the state could improve its woeful business climate—and, thus, the economy in general—by eliminating such tax breaks and lowering the general corporate tax rate by an amount equal to that of the "extra" tax revenues that the state might expect to get without these tax breaks.

As I note in the study, the impact of reducing California's corporate tax rate in a revenue-neutral way by eliminating these targeted and unfair tax breaks could be significant. As Howard Jarvis Taxpayers Foundation chairman Jon Coupal and I note in a recent Orange County Register column,

The Franchise Tax Board says the corporate tax rate could be reduced 14 percent across the board, without losing any net tax revenue, simply by getting rid of one tax break—the Research and Development Tax Credit.

Furthermore, the Reason-Howard Jarvis study shows that eliminating other corporate tax breaks for things like movie companies, computer software, timber growing, farm machinery, and the "Accelerated Depreciation of Research and Experimental Costs" credit would allow the state to reduce the overall corporate tax rate by 20 percent or more.

Each time state lawmakers carve out a special tax credit or implement policies that favor certain businesses or industries through the tax code or through regulation, they also harm other industries.

[. . .]

The error of such tax breaks is compounded when one considers that they are effectively subsidizing many business activities that would have taken place even without the tax breaks. It's corporate welfare that California doesn't need and can't afford.

In addition, the state is notorious for its lack of oversight of these tax policies. A Department of Finance analysis of state tax credits concluded that the legislative intent was "not specified" for 70 of the 82 tax expenditures reviewed.

California's terrible business climate—due primarily to its burdensome taxes and regulations—has played a significant role in its economic stagnation and malaise. California has the ninth-highest corporate tax rate in the nation, at 8.84%, and the highest rate in the entire western half of the continental United States (which gives one an idea why so many businesses are fleeing to states like Texas, Utah, Nevada, Idaho, and North Dakota).

According to Chief Executive magazine's Best/Worst States for Business survey, California's business climate ranked dead last for the eighth year in a row. Among the responses from the CEOs surveyed were the following:

It is time policymakers in California realize the more taxes and more regulations are not getting the job done. If they truly want to jump-start the state's economy and "create jobs" (which, of course, only private-sector businesses—not the government—can do), they should reverse the many years of failed policies by reducing the high taxes and voluminous red tape that are strangling the state's economy. A good place to start would be to level the playing field by getting rid of special tax breaks for politically-favored industries and cutting business taxes across the board.

» See the full op-ed article here.

» The Reason Foundation-Howard Jarvis Taxpayers Foundation California tax credits study is available here.

» See my previous blog post about the California tax credits study here.


Adam Summers is Senior Policy Analyst


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