This November, voters have an important question to ask when they go to the polls: Will my vote motivate employers to hire again in California, or propel them to leave the state instead?
A critical signal will be how Californians vote on Proposition 30, the tax increase on sales and upper-income residents, including many small businesses, which would raise an average $6 billion a year. The measure, championed by Gov. Jerry Brown and unions, is polling ahead of a rival tax measure, at around 50 percent.
For those still wavering, here are some thoughts to consider: First, more than any other state, California has proved that we cannot tax our way to prosperity. California already has the nation's highest sales tax and the second highest income tax, following Hawaii. If Proposition 30 passes, we will have the top income tax rate in the nation. Every similar attempt in modern memory to solve the state's chronic budget deficits through tax hikes, including a $12.8 billion tax increase under former Gov. Arnold Schwarzenegger in 2009, has failed.
The problem is that Proposition 30 treats the symptoms of California's fiscal trouble rather than its causes a shrinking tax base with 2 million Californians out of work, an exodus of people and employers to other states, a government that spends more than it takes in, and an increasing burden on a shrinking percentage of taxpayers.
A new report, "The Great California Exodus: A Closer Look," by the Manhattan Institute found that California, which used to be a "cherished destination," is now too often "the place to escape." Californians are fleeing mainly to Texas, Nevada and Arizona, where living and doing business are less expensive. Between 2000 and 2010, this exodus resulted in $14.7 billion in income shifting from California to those three states alone.
Had this income stayed in our once-golden state, it would be contributing to the tax base, not subtracting from it.
In the last four years alone, California has lost 2,500 employers and 109,000 jobs to other states, according to a report by the American Legislative Exchange Council, a trend underscored by the recent pullout of Campbell Soup Co. and Comcast Corp. from Sacramento. Proposition 30 would further harm the business climate.
In addition, Proposition 30 continues turning our tax system which, like a pyramid, used to have a broad base upside down so that now a tiny portion of the population is bearing the tax burden for the rest. How long can this structure last without collapsing?
In 2009, the most recent data available, 14.6 million tax returns were filed in California, of which 5.2 million had no income tax liability. Over the past two decades, the percentage of U.S. tax filers who pay no income taxes due to tax credits and deductions has nearly doubled to 41 percent of taxpayers, according to the Tax Foundation. Counting those who don't earn enough to file a return, roughly 50 percent of American households are "outside the income tax system."
What's more, this trend is reaching upward into the middle class. A single mother in California with one child will owe no state income taxes for 2011 unless she earns at least $41,689, according to the California Budget Project. A family of four with two children will owe no state income tax unless their income reaches $52,389.
This means not only lost revenues to government but a phenomenon termed "fiscal illusion," or the perception that the cost of government is "cheaper than it really is," according to the Tax Foundation, which can propel people to demand "ever more government benefits" because they don't feel the cost directly.
Proponents of Proposition 30 appear to be counting on this "fiscal illusion" to entice people to vote to "raise the other guy's taxes." In California, only 3.9 percent of tax filers earn more than $200,000, but already pay roughly 54.5 percent of the state's personal income tax revenue. The 64.5 percent of filers with incomes under $50,000 pay only 4.7 percent of taxes.
Proposition 30 would further punish the work, savings and investment of those earning $250,000 or more, including small businesses, starving the state of the economic growth it needs to create jobs. A broader tax base and lower rates, many economists believe, would spur growth instead.
Finally, while government expects some of the hardest-working Californians to tighten their belts, it plans to loosen its own. State spending will shoot to $130.7 billion this year, up $8.9 billion, or 7 percent, over last year.
Will voters' decisions help unleash the power of California's economy and generate job growth again, or will their choices further dampen the entrepreneurial spirit in this state?