In an effort to combat California’s $34.6 billion deficit,
the largest in the state’s history, Governor Gray Davis
proposed $8.3 billion in tax increases while leaving corporations
out of the mix in the budget he unveiled last week. When combined
with federal tax reductions, the changes mean California
corporations will pay a lower percentage of their profits in taxes
than at any time since the 1950s. Consumers, on the other hand,
will face a higher sales tax on goods and an increased income
tax.
Davis’ rationale for leaving corporations exempt from
increases, even though a return to peak rates would generate $4.7
billion in new revenue, is that he wants to focus on employment.
Corporations that are taxed too highly by California pose a flight
risk to other states, Mexico, Southeast Asia and other places
abroad with cheap labor. And with those corporations come many of
the jobs Davis is so fervently trying to protect and create to save
the state economy.
It is very difficult to tax corporations without having them
pass the burden on to consumers. If corporations leave the state,
Californians lose jobs. If corporations stay in California with
increased operating costs, they may lay off employees or find
employees who will work for lower wages. Or corporations may raise
the price of their products to compensate for tax increases, which
would be doubly painful to consumers who buy the products and have
to pay the sales tax that is quickly approaching 9 percent.
Since corporate taxation is such a touchy issue, the best answer
to California’s problems would be a deus ex machina from the
federal government. Although it would not be good for President
George W. Bush to set a precedent of bailing out states in economic
turmoil because states would have a diminished incentive to
effectively manage their own budgets, it would behoove Bush to help
California now. California is not like other states; it has the
fifth largest economy in the world. If Bush adopts an economic
growth plan more like the Democrats’ proposal that gives
increased funding to state programs in need, Bush could bolster the
national economy while he helps Californians.
The $34.6 billion needed to swoop in and save California is only
a small fraction of the monumental $674 billion tax break Bush gave
the wealthy by eliminating federal taxes on dividends. And $34.6
billion is chump change compared to the $2.1 trillion defense
budget Bush unveiled in 2002. The United States is exponentially
more powerful than any other nation from a military standpoint.
Bush can afford to sacrifice a tiny portion of the defense budget
to salvage the “home front.”
Bush needs to realize that the federal government and state
governments are not economically independent. If the economy is
strong in a powerhouse state like California, California residents
and corporations will have more money that can flow to the federal
government through income taxes and increased consumer
spending.
For now, Davis is trapped struggling to find a way out of the
problems he has exacerbated. Davis should realize the federal
government will not completely bail him out so he should start
exploring other options. Raising taxes on the wealthiest citizens,
who will also benefit from Bush’s economic plan, is a good
place to start.