California’s embarrassment of tax riches
California politicians, including Gov. Gavin Newsom and majority party legislators, practically break their arms trying to pat themselves on the back for the fact that California has a large and unexpected budget surplus. According to last month’s report from the California Department of Finance, general fund receipts for the first seven months of the current fiscal year were $10.5 billion above the Governor’s Budget forecast.
But government policies had little to do with the generation of this excess revenue. After all, more so than most other states, California imposed some of the most draconian lockdown laws (many pursuant to executive orders) in the nation. But California taxpayers continued to contribute to state revenue in large amounts, not because of these regulations, but in spite of them. The reality is that the private sector can adapt with more innovation and flexibility than is ever demonstrated in the public sector. Companies allowed their employees to work from home and for many businesses, particularly in the technology sector, operations scarcely skipped a beat.
That doesn’t mean that there hasn’t been private-sector pain. The government-imposed lockdowns have crushed many service industries such as hair salons, restaurants, the travel industry and theme parks. This is evidenced by California’s continued high unemployment rate and steady outmigration of both businesses and individuals. Nonetheless, the “California Tax Machine” (the actual title of a book) continues to chug along.
Strangely enough, the billions of dollars of unanticipated revenue in California presents an embarrassing situation for Democrats in both Sacramento and Washington. In the state Capitol, a brimming treasury removes the need for more tax hikes. Such calls for new taxes were difficult enough with California’s already highest-in-the-nation income tax rate, state sales tax rate and gas tax. But now such proposals just look greedy, much like a billionaire expecting a working class relative to pick up the check at a posh restaurant.
Of course, that hasn’t stopped the most radical of progressives from putting several such proposals on the table, but even some Democrats are pushing back on the idea of higher taxes. For example, Gov. Newsom has so far rejected the idea of one of the more radical proposals, a wealth tax on California’s millionaires and billionaires.
Shamelessness on the part of progressives is also evident in Washington, D.C., as Democrats debate Republicans over the next round of COVID-19 relief. The former have argued for a massive $1.9 trillion package while Republicans argue for a more targeted package. As of this writing, it appears that Democrats will get most of what they want with a final product close to the $1.9 trillion passed by the House of Representatives with only a few minor tweaks in the Senate.
This is a shame because less than ten percent of the $1.9 trillion is actually related to COVID-19 relief. The rest is nothing more than a bailout package for mismanaged, profligate states and public-sector unions. For example, there is a special provision giving federal employees a cash payment if they have been unable to go to work because they had to stay home with their children. A nice perk, but why not give it to private-sector employees as well?
Fiscally prudent states also have a legitimate complaint that $86 billion in so-called “COVID relief” will actually go to shore up the public pension funds of states run by Democrats. Illinois and California are the two biggest examples.
Last week, the non-partisan Tax Foundation released a shocking analysis showing that the state aid in the so-called American Rescue Plan Act is actually 116 times the states’ revenue losses: “The preliminary data suggest that states closed out calendar year 2020 with only $1.7 billion less revenue than they generated in 2019 (a decline of less than 0.2 percent), not counting federal assistance, while municipal governments actually experienced substantial revenue growth due to rising property values. Yet the American Rescue Plan Act sets aside $350 billion in additional state and local aid. Increasingly, federal proposals to provide a cash infusion for state and local governments has become a solution in search of a problem.”
Consistent with the Tax Foundation’s report, California has increased spending at levels far in excess of both inflation and population gains. Perhaps that is why Californians wisely rejected statewide tax hikes including the infamous “split roll” proposal which went down to defeat in November.
Will this potential embarrassment be enough to derail adding $1.9 trillion to the federal debt? Probably not. Democrats, while they have paper-thin majorities in both houses, seem immune to shameful scrutiny. But just as in President Barack Obama’s first two years, which included jamming through the ironically labeled “Affordable Care Act,” progressives have a way of overreaching when given power. This could very well catch up with them in the midterm elections, and 2022 is not that far away.
Jon Coupal is president of the Howard Jarvis Taxpayers Association.