Governor Brown’s Anti-Growth Tax Ideas for California

Politicians have an uncanny ability to talk themselves into very foolish things. Jerry Brown, the governor of California, is in the midst of displaying this disturbing skill.

Consider the opening from a May 22 CBS/AP report: “Gov. Jerry Brown is pitching his proposal to raise the state sales and income taxes to an audience that traditionally opposes tax increases—members of the California Chamber of Commerce. The Democratic governor wants voters to approve the temporary increases in November as part of what he described as a series of steps to help California recover from the recession without deeper cuts to education and social services.”

Now, keep in mind how grossly noncompetitive California taxes already are. On the 2012 edition of SBE Council’s “Business Tax Index,” California ranked a pathetic 45th among the 50 states and District of Columbia.

As explained in the Index (which I author): “Each tax hits business directly or indirectly, distorts the workings of the marketplace, and diminishes economic efficiency by shifting resources from the private sector (guided by prices, profits and losses) into government (guided by politics and special interest pressures). But different taxes affect economic decision-making in different ways and impact the economy to differing degrees. For example, income taxes are the most damaging levies, as they impact incentives for working, investing and entrepreneurship. Property taxes affect decisions regarding investments in buildings and housing. And consumption-based taxes can divert and reduce consumer purchases. In the end, though, all taxes matter, whether imposed at the federal, state or local level of government. They matter to consumers, entrepreneurs, investors and businesses. They matter in terms of a state’s competitiveness. And they matter when it comes to economic growth and job creation.”

But Jerry Brown, and many other California politicians choose to simply ignore this Economics 101 observation on taxes.

Instead, Brown wants to make California’s state tax system even more non-competitive and costly.

Brown’s ballot initiative, which will be voted on in November, would jack up the state’s top personal income tax rate from 10.3 percent – which already is the second highest state rate in the nation – to 13.3 percent. For good measure, along with increases in state income tax rates, the state sales tax would increase from 7.25 percent to 7.5 percent.

Here’s a little tidbit of tax history: When Jerry Brown ran for president in 1992, he called for a flat federal income tax of 13 percent. Now, the same person wants to raise the state income tax rate in California to 13.3 percent. Go figure.

Considering that more than 92 percent of businesses file taxes as individuals (e.g., sole proprietorship, partnerships and S-Corps.), this personal income tax hike is a direct tax hitting the bottom lines of small businesses.

But keep in mind that the individual capital gains tax rate will rise to 13.3 percent as well. For innovative entrepreneurs looking to start up, expand, generate growth and create jobs, it will be much more difficult to find the capital needed, as an even higher state capital gains tax rate (California already has the highest rate), if approved, would create far greater incentives to invest elsewhere.

Keep in mind that nine states – Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming – impose no individual capital gains levies.

Jerry Brown wants to help California recover from recession. Unfortunately, his tax plan would accomplish the exact opposite. It would merely make an already inhospitable policy climate for entrepreneurship, business and investment even more inhospitable, thereby reducing the capital available for investment, and restraining risk taking and growth in the state.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.