Taxable Talk

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

In California's last fiscal year (July 1, 2006 to June 30, 2007), 89,000 more people moved out of California than moved into the state. This is according to the annual report of the California Department of Finance. The state still grew in populations, based on births and immigrants from abroad.

Why are families emigrating from the Golden State? Could it be California's high individual income tax, which it makes it much less of a Golden State for retirees than neighboring states such as Nevada? Could it be that California's abysmal business climate (the state ranks 47th) is driving businesses from the state? Perhaps it's a combination of both.

The Los Angeles Times quotes Howard Roth, Chief Economist of the Department of Finance, as stating, "[The exodus] won't be the lasting problem we had in the 1990s. It will go away." Is he correct?

I have my doubts. The state has a $14 billion budget deficit. Democrats in the legislature are talking about cutting various tax deductions, such as the mortgage interest deduction, and are looking at other schemes to close the gap such as increased user fees and tax increases.

If and when Sacramento gets serious about cutting the state's bureaucracy I'll agree with Mr. Roth that the exodus is temporary. If not, it may be something that's much longer lasting.

News Story: Los Angeles Times

When NBC's Saturday Night Live looks saner than California's legislature, there's a problem.

Today, California's legislature will look at a new health insurance program, estimated to cost $14 billion. Interestingly enough, California's budget deficit for this fiscal year is now estimated at $14 billion.

California's budget crisis keeps getting worse. Reports have surfaced that the Governator will declare a "fiscal emergency" in early January; the deficit for this fiscal year is now forecast as somewhere between $10 and $15 billion. That's a lot of money, and will require significant monetary machinations.

The Instapundit predicts that the governor will propose a "moderate" tax increase. However, California is one of the few states where all tax increases need a 2/3 vote of both houses of the legislature. The Flash Report stated that Assembly Leader Mike Villines told Michael Der Manouel, Jr., the president of the Lincoln Club, "Tax increases are dead on arrival in the State Assembly, there isn't a revenue problem."

So we will likely see the unstoppable force (Democrats love of tax increases) running into the unmovable object (Assembly Republicans rejection of any tax increases). Things will likely be very, very nasty in Sacramento, and at a minimum expect "user fees" to increase dramatically. Add in a possible recession in 2008, and the political scene will be very ugly.

I used to work in Stockton. And I know that I have at least one reader who resides there (a former co-worker). He is probably already aware of the problems that the Sang family faces.

Richard Sang, his wife Amber Lao, and their sons Brooke Sang and Richie Sang own several restaurants: Mallards in Stockton and Modesto, the Cedar Creek Inn in Palm Springs, and the Fish Market and Grill on the Lake in nearby Mission Viejo. The Stockton Mallards closed in October; the Modesto Mallards closed in November. Many restaurants fail (it's a very tough business). However, both Mallards failed in spite of the owners allegedly pocketing payroll taxes withheld for the state.

San Joaquin County Deputy District Attorney Sudha Rajender told the Stockton Record that "[The owners] were withholding [the taxes], but they were pocketing it." In total, the four are facing 36 counts of fraud and tax evasion. The elder Sang has been through charges like these before; he was convicted on federal charges in Washington state in 1991.

Meanwhile, California's Employment Development Department (EDD) has already fined the owners $100,000 for not having workers compensation insurance at the Modesto Mallards. And the owners are facing a $1.6 million lawsuit over defaulted loans and owe $10,000 to Stanislaus County for unpaid property taxes.

Currently, the Mission Viejo restaurant remains open. I hope that continues (at least for the short-term); I am part of a group that has a breakfast meeting there every Friday morning. Given that Mr. Rajender told the Marin Independent Journal, "I've never seen a case like this before. These guys have gotten away with this for some time, and nobody has been interested in prosecuting them before. It's very complicated." I suspect we may soon be looking for a new location to meet.

Modesto Bee Story Here

If you own property in California, Monday is the deadline to pay your first property tax bill. The bill must either be paid in person at your county's tax-collector's office or it must be postmarked by Monday. Your tax-collector may offer payments by credit card or over the Internet; you can check this by calling or looking at your county's web site.

The second payment is due on April 10th.

Larry McCarthy, President of the California Taxpayers' Association, lost his struggle with cancer. He was 59.

Mr. McCarthy was a tireless champion of taxpayers in a state where many legislators' views of taxpayers is how do we find a new tax to impose. He fought for taxpayers rights for over 30 years. He will be missed.

A tribute page to Larry McCarthy is here.