The Daily News of Los Angeles
January 21, 2003 Tuesday, Valley Edition
HEADLINE: DAVIS TAXES WILL MAKE A BAD SITUATION WORSE
BYLINE: Robert Krol And Shirley Svorny, Local View
CALIFORNIA'S regulatory excesses and growing tax burden hamper business expansion and job creation. Gov. Gray Davis' plan to resolve the current massive budget deficit moves the state further along an ill-advised path. His plan to reduce the deficit includes tax increases that perpetuate the expansion of the public sector in California at the expense of private jobs and prosperity.
Government has a role to play in protecting rights and providing basic public goods and services. But it is easy for politicians to go too far. New or expanded programs are traded for your votes. Taxes grow. Regulations are hidden taxes. The recent passage of the family leave bill is an example of legislation that raises the cost of doing business in the state. Firms will be less inclined to hire, and workers will find it harder to find jobs in a heavily regulated labor market.
Increasing tax rates and adding regulations designed to meet the political demands of special interests reduce economic freedom and, ultimately, impinge on prosperity. Collaboration by analysts at the Fraser Institute in Vancouver, B.C. and the National Center for Policy Analysis in Dallas has led to defining a measure of economic freedom at the state level. In 2000, California ranked 35th of all the states. If California had the same level of economic freedom as the average state in the United States, the researchers estimate that current income would be close to $1,300 a year higher for each person in the state, and future growth would be positively impacted as well.
This gives a sense of what regulations and tax rates are doing to impact the standard of living of Californians. It is consistent with another study, by the Cato Institute, that found differences in growth rates among states with varying tax and spending policies. During the 1990s, the study identified the 10 states that cut taxes the most. In those states, job growth was 25%, unemployment averaged 3.6 percent, and personal income increased 74 percent. In the 10 states that increased taxes the most, job growth was 9 percent, unemployment was 4.2 percent, and personal income increased 57 percent. Bond ratings were lower in high-tax states, saddling them with higher interest costs. Although there are other factors outside government taxing and spending that affect these measures, one has to wonder how California will do in the next few years if it adopts the governor's tax increases.
States with lower tax rates create more jobs and generate greater wealth for their residents. Despite repeated attempts by governments to create programs to expand employment, the most effective way to reduce the share of people living in poverty and to facilitate the transition from welfare to work is to take steps to increase economic activity.
The prescription for working our way out of state budgetary problems is clear. Don't raise taxes but, instead, cut government spending. In addition to across-the-board spending reductions, politicians need to eliminate costly programs of questionable merit that burden the economy, such as occupational licensing.
Evidence suggests that savings come from bringing competition to the government provision of services through competitive sourcing - allowing private firms to compete for public service contracts. In California, competitive sourcing has the potential to reduce expenditures on higher education, criminal justice, infrastructure maintenance and a variety of other activities currently produced by the public sector.
Robert Krol and Shirley Svorny are professors of economics at California State University, Northridge, and authors of the Cato Journal article "Regulation and Economic Performance: Lessons from the States."