Episode 7: Taxes, Taxes and More Taxes

Welcome to the Workplace, a podcast by Cal Chamber. I'm Alan Zarenberg, Cal Chamber President. With me is Lauren Kay, President of the California foundation for Commerce and Education. Thanks for listening. And for all of you who have enjoyed our podcast previously, I'm not sure you're really going to like this one because today we're talking about taxes, tax proposals. And even though California is enjoying its ninth straight year of economic growth, we have a solid budget surplus and a rainy day fund. The legislature just can't seem to help themselves with the desire to raise new taxes. Right now they are proposing more than $25 billion in new taxes. They like to tax water, they'd like to tax food, medicine, tires, business, a little bit of everything. Lauren, what the heck is going on here?

Well, Alan, you named it. They see a whole bunch of revenue coming into the state government and that just makes them want to bring in more. California has, according to Governor Newsom, $13 billion more in revenue than it needed this year. So fortunately, he's putting it into a rainy day reserve. But we are awash in revenues and that's even before the budget brimming IPOs that you'll see out of Silicon Valley a little later this year.

So some of these taxes are like to do some good purposes in the eyes of the proponents of the taxes, you know, to clean up water runoff or to advance schools. But isn't the surplus enough? Well, let me step back. Don't we have a rainy day fund? Didn't the voters adopt the rainy day fund a number of years ago when Jerry Brown put that forward? And to guard against downturns in the economy? Isn't there a lot of money in there to start with?

Oh, you bet. In fact, Jerry Brown pretty much filled up the rainy day fund and Governor Newsom is topping it off. So they've been responsible in that regard.

So between the rainy day fund and the surplus, we have over $20 billion in extra revenue.

That's right.

But people still, that's not good enough. Right. We still want to raise more taxes.

You know, there is no shortage of, as you say, good ideas, and I'll put that in air quotes, good ideas to spend money on.

Well, let's talk about a few of these because some of them deal with sales taxes on services. Some deal with raising the corporate tax rate. How much money are we talking about here?

Well, you talked about sales taxes and corporate taxes, so I want to dive right into the biggest one on the table of all. And that's a proposal to raise sales and Corporate taxes by more than $20 billion. And it's an amazing proposal since some of the ideas in there have never even been proposed. For example, this tax bill would for the first time apply the sales tax to food, to food and water, which is, as you know, you don't pay taxes on when you go to the.

Grocery store, nor should you.

No, no, of course not. It would apply the sales tax to your utility bill. Well, local government puts taxes on utility bills, but I guess that's not good enough. It would apply taxes to prescription medicine. It would also get rid of probably the most important corporate tax incentive that we have in California, which is the research and development tax credit. The Milken Foundation, Southern California, a noted think tank, has said that the research and development tax credit is the most important ele of California's innovation strategy and contributes to hundreds of thousands of middle class jobs.

Well, isn't the research and development tax credit, along with our research universities, a magnet for high wealth jobs in California?

Oh, absolutely. It's well paid jobs and middle class jobs. It drives technology, agriculture, manufacturing. The whole range of economic sectors in California can grow in California because of the R and D tax credit.

Well, that also leads to jobs for attorneys and accountants and people who are going to maintain the buildings, the architects that build the buildings. So there's a multiplier effect when we have more research here in California. And that's what's driven our economy significantly, isn't it?

Yeah. And I'll get back to something that you just touched on the research universities. There's a real virtuous cycle between the research universities that we have up and down the state, about 10 of them, and the research that's created there, it turns into applied industry. It rolls off what begin as small businesses and grow into much larger businesses, all the while creating jobs and economic growth and healthy communities.

So isn't this backwards? I mean, the reason we have so much budget surplus and revenue surplus, because the economy is good. And here there are people that are proposing the turn the economy around the other way. Isn't that going to result in less taxes?

Yeah, but you know what I think it is? It's because unfortunately there are people in California and some of them in positions of influence who don't understand the connection between economic growth and tax revenue. It goes in that direction. Just like you say, economic growth creates tax revenue. It's not the other way around.

I mean, there's a lot of discussion about how our tax structure is volatile. This is why Jerry Brown, when he was governor, proposed A Rainey fund because we have a lot of volatility in our tax revenue because we rely on personal income taxes from high wealth individuals to fund how much of our budget? Half our tax revenue.

Yes.

Half our tax revenue. And you know, so when people talk about tax reform because it's so volatile, isn't there a problem there? Because our high income. You can't reduce the volatility unless you reduce the high wealth taxes, the income taxes, and spread it among other people. Is that very popular?

Well, it's obviously popular in the other direction because Governor Brown, notwithstanding his statements about volatility, successfully sponsored a surtax to the income tax which taxed high wealth individuals even more. And then that was extended a few years later. So we have the highest income taxes in the nation applied to people who make over a couple hundred thousand dollars a year all the way through 2030. So those are in the Constitution, which means they can't be repealed, but with a vote of the people.

So that would require saying that I'm going to reduce the taxes on a high wealth person and I'm going to replace it with a tax on myself, on my haircuts, on my car repairs, on any number, on my water, on my any number of things. And that isn't very likely to happen. So if you can't do tax reform, these tax proposals would just result in more tax revenue, right?

Well, I'm sensing a pattern here, Alan. The bottom line for tax proposals is that they raise more taxes. It's a rare and almost exotic thing that you find a tax proposal that nets out with no tax increases, much less fewer taxes.

So on top of all these, we have already qualified for the November 2020 ballot a proposal to raise business property taxes. Those taxes ended getting paid by the average voter, don't they?

Yeah. There's a saying which is really quite true, which is businesses don't pay taxes. Their customers, their employees and their shareholders pay taxes. So what you would find if the property taxes on business went up in California is you would find the price of goods higher. You'd find employees with probably net less compensation. You'd find small businesses who rent property from bigger businesses with bigger rent bills. So it would flow into, or I should say out of the pockets of consumers, employees and small business owners in California.

So this is a lose lose. The consumer would pay more in taxes and the business would end up raising their prices with elasticity in certain markets, resulting in less revenue for them and less jobs for them too. So there's nothing good that comes from this?

No. Unless you're at the receiving end of the tax increase.

Unless you're getting the tax revenue spent on you. Is that the way it works?

Or even better if you're the one who gets to pass out the taxes to the beneficiaries.

Since we're talking about taxes on business, are there other taxes on business that are going to get passed on to the consumer? And how volatile and how high are those?

Well, there is a tax that was just proposed last week that I'm still scratching my head over. Alan. This is a increase in the corporate income tax in California that would bring the top tax rate for some companies, and this is not a typo, to 22.26%. That is 150% increase over the current corporate tax rate. It would make California's corporate tax the highest in the nation. You know, if they pass this bill, California would have the highest or the second highest tax rates on income taxes, sales taxes, motor vehicle fuel taxes and corporate taxes. It's just astonishing.

We're talking about things that impact consumers. Isn't there a tax on our fuel that would be our gasoline that's extracted from the ground? A new oil severance tax.

That's right. This is an idea that comes up frequently and it is truly a lousy idea. Because while it would tax oil when it comes out of the ground, oil and natural gas when it comes out of the ground, the result of it, besides some tax revenues for politicians to spread around, would be to increase costs to the companies who produce the oil and natural gas, which means, as we talked about earlier, their employees would suffer because the production that's uneconomic would be shut down. Prices would increase, and you'd feel that at the gas pump. But how about this? It would actually increase greenhouse gas emissions because instead of producing the petroleum and turning it into gasoline in California, this has nothing to do with reducing gasoline use. This just increases the cost of pulling petroleum out of the ground.

So most people don't realize that we produce almost 40% of the gasoline we extracted here in California. We provide jobs. These are good high paid jobs in various parts from the Central Valley to the coast to Los Angeles that don't necessarily require a college education, but work for second chancers and people that are trying to move up the economic ladder.

Right. So instead of producing it here in California, we'd get to import more of it from Saudi Arabia, Indonesia and other.

Popular parts of the world where they don't have the environmental protections that we have on our oil production or the.

Protections for the people who are working in the oil fields.

So one more lose, lose. It would cost us more money increase greenhouse gases and not be as protective environment as we have today by producing the oil in California.

Sounds like a well thought out idea to me. What do you think?

One more bad idea. You know, these are no laughing matter. We can be a little facetious here, but these taxes are real and they hurt people and they hurt California jobs.

That's right. And you know, in the past we've been able to stop, well, frankly, virtually all of these taxes that business face. We had enough legislators to either stop them there. Governor Brown was not a big fan of raising taxes on businesses. But we've got a whole new situation that we're facing this year.

So let's just close this up here with the burden here. We have, you know, $18 billion in a rainy day fund and another $13 billion in a surplus of excess revenues. We have more money coming in because of these IPOs that are going to happen in California with Uber and Lyft and Pinterest that are going to create more wealth for Californians and they're going to pay taxes on those stock options. So we have more revenue coming in. But there no shortage of people who want to raise the average person's taxes.

I think that's appropriate on a week where we've just paid our taxes. I know I paid my taxes and it wasn't fun.

Lauren, thanks for joining us. And to all of you listeners, thanks for joining us at the workplace. Please comment, share and subscribe to Cow chambers podcast@calchamber.com.