Learn from mistake - don't repeat it
Davis' push to raise taxes ignores revenue plunge when Wilson did same
By TOM MCCLINTOCK
Republican State Senator from Thousand Oaks
When Gov. Gray Davis unveiled his plan last month to reduce the deficit in part by increasing state taxes by $8.2 billion, he boasted that it was "patterned after the successful model" once used by Gov. Pete Wilson. Liberal pundits across the state chimed in that it was "the only responsible thing to do."
Davis' comparison was accurate. In 1991, Wilson imposed $7.3 billion of direct tax increases in an attempt to plug a deficit of similar magnitude, and Davis' proposal is strikingly similar. Wilson boosted the sales tax 1.25 cents per $1 (Davis wants a 1-cent hike) and kicked upper-bracket income-tax rates to a historic high of 11 percent (which Davis wants to repeat).
There's also a precedent for the third component of the Davis plan: more than doubling the cigarette tax. That was done in New York City last year.
But what Davis left out of his walk down memory lane is what happened to California and New York City after they raised taxes in exactly the same manner as he now proposes.
In the quarter following Wilson's sales tax hike, retail sales in California plunged faster than they had at any time in the prior 30 years. That's a significant event, since two-thirds of economic growth depends upon retail sales.
Even without an increase, California already has the highest sales tax rate in the nation. And next door, Oregon has no sales tax - a condition that has already destroyed retail commerce in every California community within driving distance of the border. A Yreka resident shopping for a new refrigerator, for example, saves $160 simply by making a 45-minute drive to Medford, Ore. Filling a 20-gallon gas tank on the way home will save an additional $8.
And for those who can't run for the border, the Internet offers all Californians a sales-tax-free environment as close as their computer. Although all out-of-state transactions technically owe a use tax, collecting it is virtually impossible.
Boosting income taxes on the rich also has practical problems. California's income-tax rates are already the highest in the nation and are radically disproportionate. The top one-quarter of 1 percent of the state's income taxpayers - just 32,000 people - pay nearly one-third of all income taxes. Next door, Nevada has no income tax.
Just a relative handful of those upper-bracket taxpayers rearranging their business affairs to claim Nevada residency would produce a devastating effect on state revenues. As economist Arthur Laffer has observed, there is nothing more portable in this world than money and rich people.
Davis' proposal to more than double the cigarette tax has also been tried. When Mayor Michael Bloomberg doubled the total cigarette tax in New York City last fall from $1.58 to $3 per pack (Davis' proposal would raise it from 87 cents to $1.97), cigarette sales instantly plunged 64 percent.
The lesson is obvious: When a tax rate becomes excessive, it ends up losing not only the increased taxes it was hoping to get, but the existing taxes it had been getting as commerce moves elsewhere.
What happened when California raised taxes $7.3 billion in 1991?
The taxes produced only a fraction of the revenues that had been predicted, and the state's total general fund revenues actually dropped $1 billion.
They dropped another $1 billion the year after. In 1992 and 1993 - despite an improving national economy - gaping budget deficits caused Wilson to raid local government funds by $3 billion. By 1994, California ended up in de facto receivership, with the state's lenders dictating the parameters of the state budget.
When the Wilson administration began easing business regulations and reducing the state's taxes, California belatedly joined the nation's economic recovery, albeit from the bottom.
Thomas Fuller once observed that "Experience teacheth fools, and he is a great one that will not learn by it." And there, in a nutshell, is what ails California.
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