Monday, October 15, 2012

Prop 30: California's Magic Elixir

Patent Medicine - the magic potions of a century ago. They offered a cure for all ailments. Some worked better than others. A few have survived into today’s world (You can look them up). Patent medicines, usually containing a large percent of alcohol and occasionally ancient herbs or cocaine, could alleviate mild aches and pains.

Patent medicine was also known as snake oil.

Governor Jerry Brown is pushing the tax increasing Prop 30 as his magic elixir to solve the state’s budget problems. It is estimated to raise $6 billion annually. It is being pushed as a magic cure-all. It will prevent draconian cuts to the University of California, the California State University system, community colleges, K-12 education, and the list goes on. In theory 89% of the tax revenues will go to K-12 and 11% to community colleges.

Governor Brown is peddling snake oil. If he were selling securities, it would be out a bucket shop, committing securities fraud.

Let’s do the math. As of September, California incurred a $18 billion cash deficit in its $93 billion general fund. Even with the new math, $6 billion does not solve a $18 billion deficit.

The truth is that most of the tax receipts will go into plugging the even greater teacher pension deficit, and little, if any, will reach the classroom. The state's public employee pension deficit is estimated between $250-500 billion. Prop 30 is a shell game.

More facts: Prop 30 backers have raised $48.8 million. The list of donors says it all. The California Teachers Association has kicked in $7,139,080, followed by SEIU with $6,471,858, and the American Federation of Teachers' $3,858,700. The California Nurses Association contributed $1,003,669.

The second reality is that Massachusetts under Governor Dukakis, Michigan under Governor Granholm (who fled Michigan for Berkeley when she left office two years ago), and California under Governors Schwarzenegger and Brown have proven you cannot tax your way into prosperity.

The third fact is that California already has the highest sales tax and the second highest state personal income tax in the nation, along with the lowest debt rating.

Fourth, California’s high taxes and regulations have already resulted in an exodus from the once Golden State. The Manhattan Institute recently published a highly informative report “The Great California Exodus: A Closer Look.”

$14.7 billion in annual income moved out of California to Texas, Arizona, and Nevada. An average of 225,000 Californians per year left the state. 2,500 employers and 109,000 jobs moved out in the past 4 years.

The economic base of the state continues to shrink while 2 million Californians remain unemployed.

These are the new tax rates under Prop 30. Governor Brown’s new math starts the tax on millionaires on an annual income of $250,000. He said $250,000/year for 4 years equals a million dollars. At $250,000 the new tax rate on personal income will be 10.3%. It climbs to 11.3% at $300,000, jumps to 12.3% at $500,00, and then reaches 13.3% at $1 million.

This increase is “temporary” in that it is last only 7 seven years.

The new taxes are also to be applied retroactively to January 1, 2012.

President Obama talks about raising taxes on the top 1%. Governor Brown is more ambitious that the President. The Governor is looking to the top 3% for his pot of gold at the end of the rainbow. He will reap “fool’s gold.”

The top 3.9% of California taxpayers already pay 54.5% of the state’s personal income tax receipts.

We can anticipate, based on history, that high earners will increasingly leave the state, or reduce their taxable revenue. Prop 30 will not raise the anticipated revenues, but it will reduce economic activity in the state.

We can also anticipate, based on the recent history of the California Legislature, that it will appropriate every cent, and perhaps more, of the projected $6 billion annually even when it doesn’t materialize.

The sales tax, the highly regressive sales tax, will go up a quarter percent to 7.5% from 7.25% for a temporary 4 years.

California will now have, by a wide margin, the nation’s highest income and sales tax while the business climate is ranked the third worse in the nation – hardly a viable plan for an economic recovery.

And yet the political leaders of the essentially one party state either don’t understand or refuse to confront these facts.

Not only is the public employee union apparatus fighting for Prop 30, but they are also spending a small fortune to defeat Prop 32, which will forbid the automatic deduction of union dues for public employees, and Molly’s Munger’s competing Prop 38, which will also raise income taxes.

Assuming Prop 30 passes, what will the unions and the legislature do next year when it fails to produce the anticipated tax revenues?

More snake oil?

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