Is California’s Tax Burden “Fair”?

TaxesA recent report by the highly regarded Calmatters.com found that the State of California has been on a “taxing binge” over the past few years, having enacted a whole slew of recent tax increases such as the “gas tax,” the “cap and tax” energy taxation scheme.

The Calmatters.com analysis found that the recent state tax increases “plus a slew of new local government levies and hikes in personal income and taxable retail sales, will raise total tax collections to just under $300 billion, or $50 billion more than they were just two years ago,” according to the report.

“Nearly $200 billion will go to the state and more than $100 billion to schools and local governments,” states the report, which concludes that California likely has the “highest” tax burden in the nation.   (Note:  As good as the original Calmatters.com revenue analysis is, there appears to be several major revenue sources excluded such as “fee” revenue, county revenue sources, and “special district” revenue to name a few.  Based on my rough estimations the total state and local burden is likely closer to $400 billion, possibly more, if “all” revenue sources are included) 

That puts the state’s total estimated tax burden at an estimated $300 billion, which is roughly 11.5% of the state’s economy, based 2016 California Dept. of Finance figures that peg the state’s total economic activity at about $2.6 trillion.

To put this into perspective, the federal budget recently approved by the Senate proposes about $4 trillion in spending, which is about 21% of the nation’s $19 trillion in estimated gross domestic product (GDP), according to figures produced by the Trump Administration.

It must also be noted that these figures fail to adequately account for significant “deficit spending” and “mounting debt” at all levels of government, which have the effect of pushing an increasing tax burden into the future.

Thus, while the federal government is considering a dramatic reduction in tax rates, California government continues on a “taxing binge.”

A new updated report by the California Taxpayers’ Association (Cal-Tax) found that the Democrat-run California Legislature has proposed “more taxes and fees in the first half of the 2017-18 legislative session than in all of 2015 or 2016,” states the report.

The Cal-Tax report found that California Democrat lawmakers have collectively introduced 89 proposals that “cumulatively would cost taxpayers more than $373 billion annually in higher taxes and fees,” states the report.

This “taxing binge” at the state level, has been copied at the local level of government in California in recent years with a record amount of tax and bond measures being proposed in the June and November 2016 elections.

According to a report by CaliforniaCityFinance.com, there was an “unprecedented” 452 tax increases and 184 separate bond measures placed on the November 2016 ballot by California local governments and school districts.  More than 80% of the local tax increases passed and more than 97% of the bond measures passed.

But these overall figures, don’t tell the whole story. The key policy questions that emerge are what are the factors driving this “acceleration” in the California tax burden? And how are California state and local governments spending all this additional tax revenue?

A third question that I believe must be asked yet often is not, is who is paying all these additional state and taxes?

As an expert in state and local finance, I have extensively studied the facts and evidence on all of these questions and drawn some overarching conclusions.

First, the key factor driving the recent “acceleration” in the state’s tax burden is “unchecked” and “unsustainable” increases in the “cost of government” in California at both the state and local levels.

The state’s “public employee pension crisis” is the biggest single driver of the “cost of government,” combined with significant baseline expenditure increases in current and retired public employee health care costs.

Given that labor costs typically compose more than 80% of public sector budgets, and more than 90% of the cost increases, the “cost of government” cannot be addressed without significant mitigation of public employee compensation cost increases.

Second, how are state and local governments spending this additional tax revenue?  This issue is connected to the first question and touches on perhaps one of the most disturbing trends in California public finance—this money is primarily being squandered on “unsustainable” increases in the cost of government, not on improving government services and infrastructure.

Unfortunately, the complex nature of public budgets makes it very easy to hide the nature and extent of cost increases.  But my overall conclusion is simple, the “driving forces” behind both the underlying “need” for the tax increase as well as the actual expenditures themselves are caused primarily by “unsustainable” increases in public employee compensation costs.

In short, baseline public employee compensation costs are rising at rates that far exceed average revenue growth for public agencies.  Based on my review of local and state budgets, during economic expansions stand and local revenue growth averages about 4-7% per year, compared to increases in public employee compensation costs that average between 10-25% of total agency costs.

Thirdly, who pays this increasing state and local tax burden?  This is also a complex question, but there is no question that the heaviest tax burden falls on average Californians and small businesses, particularly the poor.

A 2015 report by the California budget project, found that California’s lowest-income families pay the largest share of their income in state and local taxes, with the bottom 1/5 of all taxpayers paying 10.5% of their income in taxes.

Incidentally, these same low-income and poor families are paying nearly 70% of their income in housing costs, according to the California Legislative Analyst.

That is why the recent tax increases approved by the California Democrat Legislature are so “offensive” because they take a bad problem and make it even worse.

The $5-6 billion increase in the “gas tax” and vehicle fees is highly regressive, and so is the “cap and tax” scheme which creates a new energy tax burden that will be the heaviest on poorer individuals and families, along with small businesses.

As for the whole slew of local taxes, those also tend to fall disproportionately on “average” taxpayers, small businesses, and homeowners, as opposed to special interests who can afford to mount major opposition campaigns, thereby preventing such proposals in the first place.

Ironically, there continues to be calls for “tax reform” in California, but if you look behind these “tax and spend” efforts such as the “Make it Fair Campaign,” they all propose billions in additional taxes, particularly on individuals and small businesses.

But to truly make the state’s tax system “more fair,” that would require limiting future tax increases and lowering taxes on “average” Californians, homeowners, and small businesses.

Unfortunately, there are very few “well heeled” interest groups in Sacramento who are willing to champion that cause.

David Kersten is the president of the Kersten Institute for Governance and Public Policy—a Bay Area-based public policy think tank and consulting organization. Kersten is also an adjunct professor of public budgeting at the University of San Francisco. 

This article was originally published by Fox and Hounds Daily

GOP Tax Reform Boosts Wages According to Boston University Researchers

TAX REFORM UPDATE!!

Researchers at Boston University Agree!

In a study published this morning analyzing the economic and revenue impacts of the Republican “Unified Framework” Tax Plan, researchers found:

  • The new Republican tax plan raises GDP by between 3 and 5 percent and real wages by between 4 and 7 percent.
  • This translates into roughly $3,500 annually, on average, per working American household.
  • The source of the increase in U.S. output and real wages is the UF plan’s reduction in the U.S. marginal effective corporate tax rate from 34.6 percent to 18.6 percent.
  • According to their model, the U.S. corporate income tax represents a hidden tax on U.S. workers.

Click here to go directly to the study

Corporate Tax Reform and Wages: Theory and Evidence

New analysis from the Council of Economic Advisers proves:

  • Reducing the statutory federal corporate tax rate from 35 to 20 percent would increase the average household income in the United States by, very conservatively, $4,000 annually.
  • The increases recur each year, and the estimated total value of corporate tax reform for the average U.S. household is therefore substantially higher than $4,000 à The most optimistic estimates from literature show wages could boost more than $9,000 for the average household.
    • A 15 percent corporate rate cut could increase average household incomes from $83,143 in 2016 to between $87,520 and $92,222.
    • Median household income — meaning earnings for more of a typical household — would rise from $59,039 to between $62,147 and $65,486.
  • Literature finds countries with low corporate tax rates have seen higher wage gains than countries with high corporate tax rates.

Click here to link to study in its entirety

Will taxpayers trust the GOP again?

TaxesThe California GOP is rapidly approaching the edge of a black hole from which there is no escape. But rather than reverse course by appealing to the needs and aspirations of average Californians, the response by some Republicans in the Legislature is to rush forward to throw themselves into the abyss by supporting policies that punish the middle-class.

Only a quarter of California voters are registered Republicans, barely more than those declaring no party preference. In the Legislature, Republicans number less than a third of lawmakers in each house.

There was a time when even some Democrats in the Legislature supported a healthy economy, taxpayers’ rights and Proposition 13. If any still exist, they are hiding under their desks. Over the last two decades, that party has lurched to the left and those now in Sacramento are devoted to serving the interests of government (aka public sector unions), the ever-expanding entitlement class and the wealthy denizens of coastal enclaves.

For taxpayers, criticizing Democrats is almost too easy given how thoroughly they have abandoned the middle class. But Republicans have traditionally been held to a much higher standard when it comes to taxation and fiscal responsibility. The question now is the extent to which taxpayers can trust Republicans at all.

With Republican support, the California legislature passed several bills slamming California’s ever-shrinking middle class. First, there was perhaps one of the most unpopular bills in California history, Senate Bill 1, imposing $52 billion in permanent new gas taxes and user fees on California drivers. Next was the infamous “cap-and-trade” legislation, Assembly Bill 398. In a few short years, drivers could be paying a buck and a half a gallon just in taxes and climate fees when added to the already sky-high levies imposed by the state. Last, but certainly not least, is Senate Bill 2, part of the California’s ineffective and counterproductive response to the housing shortage. The bill would impose a $75 to $225 “recording fee” on all real estate transactions and generate as much as $258 million annually. Only in California and Monty Python movies would a tax on real estate be considered a rational response to a housing shortage.

Let’s be clear. Those legislators who best defend taxpayers are still Republican. But unfortunately, those faithful few are being smeared by association with those who bend with the wind, succumb to the next big campaign contribution or promise of some “juice committee” appointment or lobbying gig. Note that the reverse is true as well: Some Republican legislators who stood firm for taxpayers were punished by having their committee assignments revoked or banished to the smallest office in the Capitol.

Average taxpayers understand how painful these tax hikes are. But they probably don’t understand how politically incompetent the Republican leadership was in getting them passed. Republican support for tax hikes allowed targeted Democrats in marginal districts (those where a Republican has a chance of winning) to vote against the tax hikes. These Democrats can now seize the mantle of fiscal responsibility even though everyone knows that, had their vote for the hikes been necessary for passage, they would have voted yes. Time and time again, Republican support of tax hikes allowed the “lifeboating” of Democrats in swing districts. To use a phrase by one party leader, this was “felony stupid.”

Taxpayer advocates take no joy in the slow immolation of the Republican Party.

The loss of any effective opposition from a minority party is a loss to all Californians. A strong democratic process relies on the competition of ideas. Moreover, one party rule has led to an extraordinary abuse of power in several areas including campaign rules, shutting down debate and jerry-rigging agencies and commissions in ways to crush political opposition. The loss of a vibrant Republican Party in California will accelerate the state’s metamorphosis into a Venezuela-like banana republic.

In order to have a chance against the power and money of the Democrats, Republicans need to distinguish themselves on critical matters of policy. Unlike social issues — as important as they may be — the fiscal issues of economical government, reasonable taxation and protection of Proposition 13 have been the rock to which Republicans have wisely clung as California’s political skies have turned from purple to blue. A return to these principles is a necessary first step for the GOP to repair its damaged reputation.

Jon Coupal is president of the Howard Jarvis Taxpayers Association.

This article was originally published by the Orange County Register.

New tax on real estate docs adds hardships to most vulnerable

http://www.dreamstime.com/-image14115451Last week, the California Senate voted to pass Senate Bill 2 which would impose a new $75 tax on real estate documents filed with each county’s clerk recorder. If the bill becomes law, the projected revenue — over $250 million annually — would be dedicated to low income housing programs.

Like a recurring nightmare, this proposal to tax real estate transactions seems to come up every legislative session. Up to now, this regressive tax has failed to gain traction because of bipartisan opposition. Taxpayer and business interests hope that, once again, the bill fails to complete its journey through the legislative process.

Currently, certain real estate documents must be filed with the county in which the property is located.Recording fees are relatively modest, costing between $14 and $18 varying slightly among counties. The fees help defer the costs of administering the clerk/recorder’s office and, as long as the fees are low, they encourage people to record essential documents.

SB2 would increase that fee to anywhere between $89 and $93 per document; amounting to a tax increase of up to 1,250 percent. Anyone recording a property-related document would be required to pay the fee although sales transactions would be exempt. There is also cap of $225 on each transaction.

A flat rate tax on real estate recordings is highly regressive. For example, because actual sales are exempt, a person purchasing a multi-million dollar home wouldn’t pay the higher tax. But a widow recording an affidavit of their spouse’s death would. So would a contractor filing a mechanics lien for unpaid work or a senior citizen on a fixed income recording estate planning documents, including transfer upon death deeds. Moreover, the bill would make refinancing a home and loan modifications more expensive as those transactions would trigger the tax.

The biggest irony of SB2 is that it ignores basic economics. Think about it. A tax imposed on real estate transactions — obviously imposed only on those who own property — to pay for programs to make housing more affordable. This is like treating someone with a low blood count with leaches.

No one disputes that California has a housing crisis. It ranks 49th out of 50 states in housing units per capita. But SB2 only creates a different hardship as it attempts to alleviate another.

In a 2015 report by the California Legislative Analyst’s Office titled, “California’s High Housing Costs: Causes and Consequences,” the nonpartisan LAO said “the key remedy to California’s housing challenges is a substantial increase in private home building in the state’s coastal urban communities.” Furthermore, “considerable evidence suggests that construction of market-rate housing reduces housing costs for low-income households,” while government programs for affordable housing help only a fraction of low-income Californians. And expanding those programs would be “extremely challenging and prohibitively expensive.” In other words, a new tax or bond is not the way to solve this problem. Government programs cannot be the solution to fix problems created solely by government.

SB2 puts an excessive tax burden on families who have already achieved homeownership and is unnecessarily regressive. Lawmakers should reject SB2, as they have in the past, and work to remove regulations, lower building permit and impact fee costs and push for CEQA reform. Only then can we ensure that the American Dream of homeownership remains viable in California. Taxpayers should call their representative in the State Assembly and urge them to oppose SB2.

Jon Coupal is the president of the Howard Jarvis Taxpayers Association and Kammi Foote is the clerk-recorder of Inyo County.

This article was originally published by the Orange County Register

Proposed CA Bill Would Cause Massive Tax Increase and Potential International Trade War

TaxesDespite multiple tax increases being adopted by voters just last November, SB 567 (Lara) was introduced that, if enacted, will result in another multi-billion dollar tax increase on businesses and individuals. And, the bill could once again raise the ire of major international trading partners, including Great Britain and Japan.

With the newly acquired super-majority status of Democrats in both the state Assembly and state Senate, the business community has been concerned about potential tax increases brewing in the Legislature. SB 567 represents the biggest threat so far.

SB 567 would make four major changes to California tax law. According to the bill’s author, this measure “will close four popular loopholes that benefit millionaires and ensure high income earners making above one-million-dollars annually, pay their fair share in taxes.” Senator Lara also claims, “Millionaires have mastered our tax code to take advantage of popular loopholes. As a result, the super-rich and the largest corporations in California do not pay their fair share in taxes.”

The approach of seeking new sources of revenue, such as that contained in SB 567, seems counter-intuitive after the electorate adopted multi-billion tax increases just a few months ago by passing Prop. 55 (12-year extension of the Prop. 30 personal income tax increases), Prop. 56 (a $2 tax imposed on each pack of cigarettes), and Prop. 64 (which includes several tax increases on marijuana and marijuana products).

What is different for the 2017 session is that Democrats have achieved the necessary 2/3 majorities in the state Senate and Assembly to pass tax increases without any Republican involvement under the requirements of Prop. 26 (amending Article XIIIA, Section 3(a) of the California Constitution), assuming signature by the governor – or enough votes to override a gubernatorial veto. California is one of just a handful of states that requires a 2/3 majority for increasing taxes by a vote of the Legislature.

What does SB 567 propose? As introduced, the bill contains four significant tax increase provisions. First, for tax years beginning January 1, 2018, SB 567 would require charitable remainder trusts (CRTs) to be at least 40 percent of the initial fair market value of all of the property placed in trust. Existing state law exempts from state tax any charitable remainder trust including that the value of the trust must be at least 10% of the initial fair market value of all the property placed in trust.

A CRT is an irrevocable trust that generates an income stream for the donor to the CRT with the remainder of the donated assets going to charity. Unfortunately, proponents claim CRTs benefit charities but allow taxpayers to avoid paying taxes. The bill would raise the amount going to the charity by 300 percent. It would make a CRT less attractive and adversely impact charitable giving. It would also take California out of conformity with federal law, which creates administrative burdens for both taxpayers and the Franchise Tax Board in administering the law.

Second, for persons who died on or after January 1, 2018, SB 567 would revise the law so that no adjustment is allowed where the person who acquires the property has an adjusted gross income or net income over a specified amount. Existing state law, for the purpose of calculating the gain or loss upon the disposition of property, generally the basis of property acquired from a decedent is the fair market value at the date of death.

California conforms to federal tax law on the “step-up in basis” for appreciated property that has been inherited. SB 567 would eliminate this provision of federal law for those with income above $1 million, once again targeting those upon whom the State of California is ever dependent upon financially. As a result, the bill would create different rules for California taxpayers complying with federal law and force those individuals to pay capital gains on inherited property that has appreciated in value.

Third, SB 567 would retroactively to January 1, 2017 eliminate the deduction for compensation paid to CEOs for pay based on commission or on meeting certain performance goals. Retroactive tax law changes are fundamentally unfair to taxpayers as they change the rules midstream. This creates undue hardship and confusion for residents.

Existing state law, in conformity with federal tax law, provides that a publicly held corporation may not deduct remuneration paid to the CEO to the extent the amount of compensation exceeds $1 million, except where the amount is based on commission or on meeting certain performance goals. As such, a deduction for that compensation is permitted on that basis even if it exceeds $1 million. This change in law would take California out of conformity with federal income tax law by disallowing the deduction for publicly-traded corporations.

Fourth, SB 567 would retroactively to January 1, 2017 remove the water’s-edge election and specify that all existing electors would be unable to file using the water’s-edge method for tax years beginning on or after January 1, 2023, thereby forcing all corporations to file on a worldwide unitary basis. Existing state law allows corporations to elect whether their income is determined on a water’s-edge or worldwide unitary basis.

While the U.S. Supreme Court upheld California’s use of “worldwide combined reporting,” the state allowed a “water’s-edge election” beginning in 1987 due to pressure from foreign governments and multinational corporations, as well as sound tax policy. SB 567 would re-open this debate and cause countries like England and Japan to again propose retaliatory measures against U.S. corporations.

The claim by proponents of this tax law change is that corporations stash money in tax haven countries and worldwide combined reporting is the only way to tax those revenues. SB 567 would repeal the water’s-edge election and force all corporations to pay much more in corporate taxes to California. Under this approach, California companies would end up paying taxes on foreign income earned outside the U.S. which would be inappropriately apportioned to California. The bill would represent a massive tax increase disguised as “fairness” in taxation.

Moreover, SB 567 would grant California the ability to tax income earned outside of the water’s-edge of the United States, a practice which is not followed by any other state in the nation. The practical effect would be to allow the state to tax income that has already been subject to taxation by a foreign jurisdiction. And California-based companies would be subject to retaliatory tax measures by other countries in which they are conducting business.

As the Legislative Counsel has correctly determined, SB 567 makes multiple changes in state statutes that would result in a taxpayer paying a higher tax within the meaning of Article XIIIA, Section 3 of the California Constitution and thus requires a 2/3 majority vote of both houses of the Legislature in order to reach the governor’s desk. Hopefully, the Legislature will reject this measure.

Chris Micheli is a lobbyist with the Sacramento governmental relations firm of Aprea & Micheli, Inc. He can be reached at cmicheli@apreamicheli.com.

This piece was originally published by Fox and Hounds Daily.

Pot tax goes down in flames in California Legislature

As reported by the Los Angeles Times:

A bill to put an excise tax on medical marijuana in California was killed Thursday by a Senate panel after advocates for cannabis users said it would put a financial burden on patients.

The Senate Appropriations Committee shelved AB 2243 with knowledge that California voters will consider a 15% pot tax on Nov. 8 when they take up Proposition 64, which would also legalize recreational use of cannabis.

The legislation by Assemblyman Jim Wood (D-Healdsburg) would have charged up to $9.25 per ounce of marijuana flowers, $2.75 per ounce of pot leaves and $1.25 per ounce of immature pot plants.

Wood said the funding is needed to help cover enforcement and environmental costs under a new system approved last year that will license the growing, transport and sale of medical marijuana. …

Click here to read the full article

CARB Threatens Greenhouse Gas Law Extention

carbon-tax-1The California Air Resources Board set a match to controversy this week suggesting that the board could push the cap-and-trade deadline for funding greenhouse gas reduction programs past its 2020 end date by executive fiat.

That’s not the way the law works, many Republicans cried, and they are backed up by an opinion from the Legislative Counsel’s Office.

According to the opinion, “The act does not authorize the governor or the ARB to establish a greenhouse gas emissions that is below 1990 level and that would be applicable after 2020.”

Republican Senate Minority Leader Jean Fuller called the ARB proposal “illegal” and admonished the executive branch, “Californians deserve better than a government that acts as if they are above the law.”

Many in the business community feel fixes are needed to the current program before any extension is contemplated. Dorothy Rothrock, president of the California Manufacturers and Technology Association said in a release following the ARB announcement, “Manufacturing investments and jobs have lagged other states in the US over the past six years by a large margin. Future climate policies must recognize this reality and be designed to protect California’s manufacturing jobs and economy.”

The cap-and-trade policy ARB wants to extend is subject to court action already, as business interests, including the California Chamber of Commerce, brought suit claiming the cap-and-trade formula is actually a tax requiring a two-thirds vote of the legislature. The law establishing cap-and-trade, AB 32 of 2006, was established by majority vote. While a lower court brushed aside the business complaint an appellate court is now considering the matter. Observers watching court action say there is a chance the lower court decision could be reversed.

There is another way for the legislature and the governor to extend the cap-and-trade end date and lower the greenhouse gases goal below 1990 levels. Pass legislation.

That is exactly what some in the legislature are trying to do with SB 32, that would extend the law lowering the acceptable greenhouse gas level 40% below 1990 levels by 2030.

The court case, however, raises doubt about whether the SB 32 needs a simple majority vote or a two-thirds vote.

In a Flash Report column yesterday, state Senator Andy Vidak said attempts are being made by Democratic leaders in the legislature to secure enough Republican votes to allow SB 32 to pass by two-thirds. If true, that is a strong indication that the Democrats are concerned the court will side with the CalChamber over the tax issue and brand cap-and-trade an illegal tax.

Yet, the politics over changing the greenhouse gases law do not stop there. Another consideration is one posed by L.A. Times columnist George Skelton who suggested California voters in November, reacting negatively to a Trump candidacy, might defeat Republican officeholders thus securing a two-thirds vote in both houses of the legislature for the Democrats.

In that case, the strategy for the Democrats just might be to bide their time. Then again, you might conclude that the politics don’t stop at that point, even with a two-thirds Democratic majority, because the politics of energy and its cost have split the Democratic caucus in the past and could do so again.

ditor of Fox & Hounds and President of the Small Business Action Committee.

This piece was originally published by Fox and Hounds Daily

Bid to Raise California Tobacco Tax Nears November Ballot

As reported by ABC News:

A well-financed campaign backed by billionaire environmentalist Tom Steyer, medical groups and organized labor has collected enough signatures for a ballot measure to raise California’s cigarette tax by $2 a pack, officials said.

The Save Lives California coalition scheduled a news conference Monday at the San Diego County Registrar of Voters office to submit the first signatures in its effort to triple California’s cigarette tax to $2.87 a pack.

If enough signatures are verified, the measure would appear on an increasingly crowded Nov. 8 ballot alongside proposals to repeal a ban on single-use plastic bags at grocery stores and require actors to use condoms in adult films.

The announcement about the tobacco tax measure came less than a month after Democratic Gov. Jerry Brown signed legislation to make California the second state in …

Click here to read the full article

CA “Tax Freedom Day” Later Than Most States, But Hope on the Horizon

taxesAccording to the newly released report from the Tax Foundation, California’s Tax Freedom Day is April 28—the day taxpayers of the state have collectively earned enough money to pay their federal, state and local taxes for the year. While that date places the Golden State 46th on the list of state taxpayers claiming tax freedom, there is a chance that California could move up dramatically. It all depends on November’s election.

California is grouped in the back of the pack with other high tax-high income states. Only Massachusetts, New York, New Jersey and Connecticut residents pay off all their taxes after California. The national average of all states is April 24.

The good news for the Golden State is that Tax Freedom Day occurs three days earlier than last year.

Tax Freedom Day is calculated by dividing income into taxes paid in each state. Because California has seen stronger economic growth than the nation as a whole, taxes are paid off more quickly.

Taxes still take a large chunk of people’s income. The Tax Foundation report noted that Americans would spend more on taxes in 2016 than on food, clothing and housing combined.

Tax Freedom Day is always in flux depending on actions in a state. 2016 being an election year with potential state and local taxes facing voters, California taxpayers could see their taxpaying obligation rise or fall depending on election results.

One of the big items, of course, is the effort to extend Proposition 30’s income taxes. California has the top U.S. marginal income tax rate in the country. If voters reject the Prop. 30 tax extension what would that do to California’s Tax Freedom Day standing?

Joseph Henchman, Vice President of Legal & State Projects for the Tax Foundation gave me what he called a “back of the envelope” projection of Tax Freedom Day arriving “about a week” earlier if the Prop. 30 taxes expire on schedule.

If all else remains the same that means California taxpayers would jump from nearly last at 46th place in paying off taxes up to around 37th position among all the states.

This article was originally published by Fox and Hounds Daily

Government Hypocrisy: “Save More”

Photo courtesy of kenteegardin, flickr

Photo courtesy of kenteegardin, flickr

American government is so ubiquitous it even offers advice about New Year’s resolutions. However, its guidance to citizens mainly illustrates ideas government violates. Consider one example from the About USA.gov site: “Save more.”

That is not a very controversial resolution for an uncertain world. But the massive and still growing government debt and its far larger unfunded liabilities makes it the largest violator of its own resolution. Talk about “do as I say, not as I do.” Further, the main reason people save too little is that government does so much that discourages saving and investment, making the Hippocratic oath –“First, do no harm” — a better means to increase savings.

One huge illustration is Social Security. People have been led to substitute its “contributions” and retirement benefits for funds they would have saved to finance their “golden years.” Its promises also dramatically exceed what funds will be available, making people anticipate richer retirements than they will actually have, reducing savings more. Those who save enough to provide well for retirement also face income taxes on most of their Social Security benefits as well.

Social Security exacerbates the adverse effects of budget deficits, which divert funds that would have added investment into government spending.

Taxes on capital reduce the after-tax return on saving and investment, also reducing saving. These include property taxes that, while relatively small percentages of the capital value, represent sizable fractions of annual income generated. Then state and federal (and sometimes local) corporate taxes take further bites from after-tax returns. The implicit “tax” imposed by regulatory burdens must also be borne before earnings can reach investors.

Personal income taxes at up to three levels of government reduce saving further. Investment income left after other taxes is taxed again if paid out as dividends.  Earnings from saving and investment can also trigger additional tax burdens by triggering phase-outs of income tax deductions and exemptions.

If investment earnings are retained and reinvested, increasing asset values, they are taxed as capital gains. And even increases in asset values from inflation are taxed as real increases in wealth.

Medicare, whose unfunded liabilities are far greater than Social Security’s, reduces incentives to save for future medical costs. Current earners, forced to cover three quarters of the cost, are left with less to save. Medicaid coverage of nursing home costs only after other assets are virtually exhausted undermines another savings motive.

Unemployment benefits, along with food stamps and other poverty programs, also reduce the need for a nest egg, “just in case.” And as illustrated by so many disasters and crises, government steps in to assist those who “need” it, reducing the incentives for financial self-responsibility.

Estate taxes also reduce successful savers’ ability to pass on assets as bequests, eroding another savings motive. And monetary policy that has long kept interest rates near zero have undermined incentives to save as well.

Together, these government policies punish savings heavily, resulting in large numbers without appreciable savings. But fixing that saving problem doesn’t require government to tell us to resolve to save more. It doesn’t require ever more government intervention to “solve” a problem its existing interventions have created. It only requires a government resolution to stop aggressively undermining incentives to save as it does now.

Gary M. Galles is a research fellow with the Independent Institute in Oakland, and a professor of economics at Pepperdine University. His books include Lines of Liberty (2015), Faulty Premises, Faulty Policies (2014), and Apostle of Peace (2013).