Taxable Talk

And that's not good news for Sacramento.

The Tax Foundation came out today with their annual report of state tax climates. No surprise, California is the third worst climate, surpassed only by New Jersey and New York. First, here are the ten best state climates for business taxation:

1. Wyoming
2. South Dakota
3. Nevada
4. Alaska
5. Florida
6. Montana
7. Texas
8. New Hampshire
9. Oregon
10. Delaware

And now the ten worst state tax climates:

41. Minnesota
42. Nebraska
43. Vermont
44. Iowa
45. Maryland
46. Rhode Island
47. Ohio
48. California
49. New York
50. New Jersey

There is some good news for California. The Tax Foundation no longer believes that the Bronze Golden State has the worst individual income tax in the country. It's not that California has improved; rather, Maryland now has a worse system.

Maryland managed a remarkable drop—from 24th in last year’s index to 45th in this year’s—by raising its individual income tax, corporate income tax, sales tax and cigarette tax all in the same year. Maryland added four new brackets to the individual income tax, increasing the top rate by 1.5%, adding new complexity, and introducing a big marriage penalty. In fact, we now rate Maryland’s as by far the worst individual income tax in America, displacing California for that dubious distinction.

California ranks poorly in almost every category: 45th for corporate tax, 49th for individual income tax, and 43rd for sales tax. The lone bright spots are being ranked 16th for unemployment insurance and 15th for property tax.

There's bad news on the horizon for California. The recently enacted budget restricted using net operating loss carryforwards. That will lower California's score in future years. But our legislators appear to have one goal—making sure California goes to the top. Nevada, Oregon, and other nearby states aren't complaining in the least.

Governor Schwarzenegger warned that California might need a $7 billion loan because the state is currently unable to float a short-term bond. It's not that a bond issue couldn't be sold; rather, the interest rate would be quite high.

Bluntly, California will soon be forced to cut spending. The budget this year is filled with smoke and mirrors; next year's situation will be worse. Revenues have been increasing but spending has increased faster. Discipline will be enforced on the Bronze Golden State one way or another. This year's budget postponed the day of reckoning. I thought that postponement was until next summer but it might not last that long.