Tuesday, May 26, 2009

California's Tax Revolt

On Tuesday, May 19, 2009, Californians went to the polls in one of the first elections of 2009. On the ballot were five measures that would have allowed the State of California to increase taxes for various purposes. Governor Schwarzenegger and state leaders had billed the ballot measures as a way to keep state services operating and deal with the state’s deficit.

The problem was that the measures would not resolve California’s spending problems. According to the Wall Street Journal, passage of the measures would still leave the state with a massive deficit. If the measures passed, California would face an estimated $15.4 billion deficit in its general fund for 2010. If the measures did not pass, the deficit is estimated to hit $21.3 billion.

By now you may have heard that five of the six measures that were being voted on failed. The five tax increases all failed by two-to-one margins. The sole proposition to pass was a measure that would prevent elected officials from getting pay raises in years when the state ran a budget deficit. This measure passed overwhelmingly with almost 74% approval.

As returns came last night and this morning, California’s leaders must be realizing that they cannot tax and spend their way out of the mess. How did this bluest of blue states get in this fix?

California has a history of high taxes and higher spending. California’s spending has more than doubled in the past ten years. This outpaces both the rate of inflation and the rate of population growth. Much of this spending is considered untouchable. Education, spending on government employee salaries and pensions, debt service, and parks all fall into the politically untouchable category.

As California has increased taxes to attempt to pay for this spending, many of the state’s residents began fleeing to neighboring states with more attractive business environments. California refugees have found the lower cost-of-living in states such as Arizona, Utah, Nevada, and Idaho very attractive. As California’s productive citizens and companies leave, California is left with fewer taxpayers while the number of people on the government payroll remains high. These factors combined with the current recession to create a large decline in state tax revenues.

In the past, many people believed that as California goes, so goes the nation. That might be true in this case as well. Under President Obama, federal deficits have spiraled out of control. Federal budget deficits are expected to average approximately $1 trillion per year for the foreseeable future. President Obama’s plans to start a new healthcare entitlement would increase deficits even more.

To finance President Obama’s borrow-and-spend policies, the United States must find more tax revenue. President Obama has already announced plans to repeal President Bush’s tax cuts on the wealthiest five percent of Americans. Many in Congress believe that more tax increases will be necessary. One of President Obama’s first actions was to increase the federal tobacco tax. Proposals have already been floated to increase taxes on employer-paid health insurance, soft drinks, gasoline, and carbon as well as an increase to the death tax.

If the mood of California voters is any indication of the national mood, any new taxes will not be accepted happily. The grass roots anti-tax tea parties that were held around the nation on April 15 are an early sign that politicians who vote to raise taxes may face an unhappy electorate at their next election.

The federal government should realize what the California state government did not. That heavy government spending is a drain on the economy. High taxes slow the economy even further as well as causing real pain to families. In order to prevent the United States from going the way of California, we need real spending cuts.

“Schwarzenegger Puts Legacy on the Line With Budget Vote,” Wall Street Journal, May 19, 2009

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