California Economics

In most of the world, economics follows the rules you learned in school. If prices increase and the supply stays constant, demand falls; if supply decreases and demand stay constant, price increases, etc. But I’m a resident of California.

California faces a $14 billion budget deficit. As I earlier noted, Governor Schwarzenegger will be calling a special session of the Legislature in early January to deal with the deficit. Given that Assembly Republicans are vowing no new taxes and Assembly Democrats don’t like the idea of cutting programs, it should be interesting.

But that’s not the point of this article. Given the budget situation, what sane politician would propose a new tax? How about new taxes? Well, Governor Schwarzenegger and Assembly Democrats have brokered just such a package with their health care initiative.

This proposal, if it passes the Legislature, introduces three new taxes: an additional $1.75/pack cigarette tax, an employer health care tax, and a 4% surcharge on hospital stays.

Let me first note basic economics. These taxes will raise prices, thus causing demand to drop. The revenue projections won’t be met, and taxes will need to be increased further in order for the program to be funded at the level proposed.

Second, consider California’s business climate. It’s bad—California ranks 47th out of 50 states. What sane business owner would expand a business in California when neighboring states offer a much better business climate?

Third, the proposal likely violates federal law. There’s a federal law, ERISA, which courts have held prohibits states and local governments from mandating employee benefits. Indeed, just last week U.S. District Judge Jeffrey White ruled that San Francisco’s law mandating health insurance violates ERISA and threw it out. While San Francisco plans on appealing the decision, there’s lots of precedent that they’ll have to fight through.

For California’s future the state’s political leaders need to look at cutting taxes. Though this may sound difficult to impossible in a time of budget deficits, the Laffer curve has shown that lowering tax rates increases tax collections. But I’ll be shocked if we see any tax decreases.

Perhaps I’ll be surprised at the Legislature’s actions in 2008. And perhaps pigs do fly….

Wall Street Journal Editorial
Assemblyman Doug LaMalfa on California’s health care plans

Comments are closed.