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Tax Increases, Borrowing Plan Are Job Killers

Spending must be slowed

Adrian Moore
June 1, 2003

With the state of the economy, announcements of mass layoffs at some big California companies, and huge state budget crisis, it's no wonder a lot of people are nervous about their jobs. Sacramento's plans for big sales tax increases to fund borrowing our way out of debt will put more jobs on the line.

Kim Cruz, an office manager in Sacramento, told local reporters how she is being more careful with her spending because of budget-tightening at her office. The single mother has canceled plans to buy new furniture and a Jet Ski. "I'm nervous to have extra money out there on a loan," she said. And there are signs that businesses are equally nervous about new spending.

There are very good reason's for Californian's to be nervous about their job security. California is losing jobs at a horrible clip. According to state employment data, last year the rate of adding new jobs in California fell 7.8% while the rate of job losses rose 5.3%. That adds up to 350,000 jobs gone from the state last year.

And now Sacramento wants to make the problem much worse. Governor Davis's much ballyhoo'd plan to create new jobs with state projects will create fewer jobs than California's economy does naturally, and doesn't come close to catching up with job losses. The state's problem is not really creating new jobs. The problem is how to stop eliminating existing jobs by driving them out of business or out of the state.

But the legislature is moving the opposite direction with stacks of legislation seemingly perfectly designed to kill California jobs. There are 36 bills in the legislature right now that increase taxes or fees for Californians. On top of that are dozens more bills that directly increase the cost of doing business in California. When the cost of these bills comes down, it doesn't take a Ph.D. in economics to know that more jobs will be cut.

Probably the worst idea in Sacramento right now is at ½ cent increase in the sales tax, combined with expanding the sales tax to services as well as to goods. So you and I will not only pay higher sales taxes, we'll have to pay it on more things. The ½ cent increase will cost the typical family $150 per year and the expansion to services another $150 per year.

Even worse is the effect on jobs. California's 7.25% sales tax is already one of highest in the nation, and many counties have increased the tax for local use so it is often even higher. If the proposed increase passes, sales taxes in some counties will be nearly 9%! Scads of research has shown that such tax increases crush a state's economic growth and drives businesses and jobs out of the state.

Sacramento is committing that most basic sin-failing to learn from history. During the recession of the early 1990s nearly half the states raised taxes to try to increase revenues and avoid budget cuts, and those states tended to have the most persistent budget woes and the slowest economic recoveries. Meanwhile, those that reacted to the recession by cutting income taxes had double the population growth, nearly three times the job growth, and about 25 percent faster income growth than the states that raised tax rates.

Compare California to Michigan in the 1990 recession. Back then, Michigan's government made substantial spending cuts and a series of tax cuts and the states economy soon boomed. Unemployment fell and per capita incomes rose from 2.9 percent below the national average to 2.8 percent above the national average by 1995. At the same in California, our leaders enacted a $7 billion tax increase, and not only did state revenues keep falling, but the state sank deeper into recession, losing 350,000 jobs in 3 years, and we already lost that many just last year in this recession, with no tax increase yet. Back in 1995 the tax hike was repealed, and over the next four years the state gained more than 200,000 jobs and the unemployment rate fell again.

Sacramento's plan to balance the budget by borrowing billions of dollars and raising taxes is a guaranteed job killer and probably won't work. Remember last time we raised taxes during recession state tax revenue fell.

The real solution to the state budget crisis is for Sacramento to get a grip on its spending addiction and to build a stronger state economy. As more Californians get jobs and jobs pay better, people will be better off, the state will get more taxes from their higher earnings and spending, and demand for social safety net programs will fall off. The best safety net is a good job and a strong economy.

Adrian Moore is Vice President of Reason Foundation.


Adrian Moore is Vice President, Policy


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