Earlier today, the Governor announced a set of measures – nearly all changes to state tax laws – aimed at spurring California’s struggling economy. Will they work? If economic research provides any guidance, the answer is most likely no.
The largest component of the package would eliminate corporations’ ability to choose what share of their profits should be taxed in California. This proposal was part of the Governor’s January Budget proposal and it is one the CBP supports. While the Governor’s January proposal would have used the estimated $1 billion in savings to help balance the state’s budget, this morning’s proposal would use those dollars to create a new business tax break, a sales tax exemption for manufacturing equipment. While there are policy arguments that suggest that a sales tax exemption is preferable to other business tax breaks, the Governor’s proposal is a costly one that the state can ill-afford. A fiscally-responsible approach would roll back both the 2008 and 2009 “dark of night” tax packages, and use a significant fraction of the savings gained to restore spending cuts made to schools, colleges, and universities that are critical to the state’s economic future.
The Governor would also expand, rather than scale back, the hiring credit originally created as part of the February 2009 budget deal. In a recent review for the Public Policy Institute of California, economist David Neumark notes that, “Research makes clear that a substantial share – often as high as 90 percent of total hiring credit payments – pays for hiring that would have occurred anyway; these payments are ‘windfalls’ for employers.”
The bottom line? As one survey of the literature of state tax incentives concludes:
“Statistical and econometric studies are nearly unanimous in concluding that state and local tax incentives fail to attract a significant number of new businesses, create numerous jobs, or substantially enhance state economic performance. Some studies find that taxes have a positive economic effect, some conclude that taxes have no discernible effect, and some – particularly many of the recent studies – suggest that taxes have a negative impact on the economy. Most of the studies in the last group, however, find that the negative effect is small and dependent upon the unrealistic assumption that public spending remains constant as taxes change.”
Thus, the Governor’s proposal simply rearranges the dollars within a strategy that will likely have little, if any effect, without addressing the long-term budget challenges that are critical to California’s future.
— Jean Ross