California’s Real Emergency

Early this month, California Governor Arnold Schwarzenegger declared that the state of California was in a budget emergency.

On December 10, the Los Angeles Times reported: “Gov. Arnold Schwarzenegger announced this morning that the state's financial crisis has worsened substantially in recent weeks, with the projected budget deficit growing by another $3.6 billion. The news from the governor, delivered in a hastily arranged press conference, comes as lawmakers have yet to heed his call to address the problem in emergency sessions of the Legislature.”

Unfortunately, California’s Republican governor is looking to increase taxes as part of his budget remedies. On December 2, the Times noted: “Republican lawmakers, who last week blocked a Democratic proposal to cut billions of dollars from schools, healthcare and welfare programs while tripling the vehicle license fee, quickly reiterated their opposition to any new taxes, which both Schwarzenegger and Democrats say are indispensable. Democratic legislators again dismissed some of Schwarzenegger's proposals to ease labor rules on business in order to boost the economy… Assembly Republican leader Michael Villines (R-Clovis) rebutted Schwarzenegger's criticism that lawmakers are too rigid, saying in a statement that his party's anti-tax stance ‘is not blind ideology . . . but our sincere belief that higher taxes will hurt the economy and lead to more uncontrolled spending.’”

When you look at the realities of California, it’s pretty hard to argue against Assemblyman Villines. Indeed, higher taxes will make a very bad situation in California far worse.

The real emergency for the state is spelled out by its ranking on the “Small Business Survival index 2008,” which ranks the states according to their public policy climates for entrepreneurship. Quite simply, California has one of the worst climates in the nation – ranking 49th in the nation, with only New Jersey and the District of Columbia faring worse.

California’s woes include the highest personal income and individual capital gains tax rates in the nation; the highest gas and diesel taxes; very high corporate income and capital gains taxes; the imposition of alternative minimum and death taxes; a high state minimum wage; a large number of health care mandates; high electricity and workers’ compensation costs; high per capita government spending and a high rate of increase in government spending over the past six years; and a poor ranking in terms of highway cost effectiveness.

Tax increases should be the last thing that California’s governor and legislators should be thinking about, and instead, they need to find ways to rein in the size and scope of government.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council