New California Taxes

Have you heard of the new plan to close California’s $19 billion budget shortfall?  If not, here is a link to a nonpartisan report by a public radio station, 89.3 KPCC.  Here are the basics of the new plan: 1) increase income taxes 1 percent for all Californians, except for those in the highest income brackets; 2) increase vehicle fees by 0.5 percent.  To offset these increases the state’s sales tax would be lowered by 1.75 percent and Californians would be able to deduct the new taxes from their federal taxes.

Ladies and gentlemen, this plan makes no sense!!  Raising taxes during a period of weak economic growth is poor policy.  Approximately 70 percent of our economy is driven by consumption.  Increasing our income taxes will only lead to less consumption.  The offset in sales taxes will not incentivize consumers to spend more when their incomes have fallen.  Further, economic theory is clear: income taxes are more harmful to the economy than consumption (sales) taxes, so this plan is backwards in that sense.

The same argument applies to the vehicle taxes.  Car sales in California are weak.  Job losses, stagnant incomes, and concerns about future economic prosperity have lead consumers away from making big ticket purchases.  It makes no sense to increase the price of vehicles when sales are low.

Here is some food for thought.  Why is California considering raising taxes on everyone but the rich, while the Federal government is considering raising taxes for only the rich?  In this case the Feds are correct.  By definition the wealthy can afford the increase.  There may be incentive problems, but they can afford the taxes.  California should not be raising taxes on the middle class.  Instead the State should find ways to encourage the middle class to spend money.  This would best be done by increasing economic activity, opportunity, and consequently, income security.

Who comes up with these ideas?  In what universe does this make sense?  I wonder if ideas like this are responsible for our current budget crisis.  In any event, hold on to your seats.  It is going to be a bumpy ride in California, and we won’t need any earthquakes to shake things up.