California Must Reform Tax Code to Spur Economic Growth

State Should Eliminate Special-Interest Tax Breaks, Lower Business Taxes for All

Winston Churchill asked, “Can a people tax themselves into prosperity? Can a man stand in a bucket and lift himself up by the handle?”

California Gov. Jerry Brown seems to think the answer, at least to the first question, is yes.

In his recent State of the State address, Gov. Brown asserted, “California is back, its budget is balanced, and we are on the move.”

Brown is counting on an “extra” $50 billion or so over seven years in Proposition 30 tax increases to solve the state’s budget problems. He claims that revenue will be spent wisely and frugally. In truth, California is in desperate need of major tax reform if it is to prosper once again.

California has the highest personal income tax rate in the nation, the highest state sales tax and the eighth-highest corporate tax rate.

In addition to high taxes, California is home to an overly convoluted tax code with numerous carve-outs that provide special treatment for politically favored businesses and industries. A new study by Reason Foundation and the Howard Jarvis Taxpayers Foundation finds the state would be better off eliminating all credits in favor of a simplified and reduced corporate tax rate.

The Franchise Tax Board says the corporate tax rate could be reduced 14 percent across the board, without losing any net tax revenue, simply by getting rid of one tax break – the Research and Development Tax Credit.

Furthermore, the Reason-Howard Jarvis study shows that eliminating other corporate tax breaks for things like movie companies, computer software, timber growing, farm machinery and the “Accelerated Depreciation of Research and Experimental Costs” credit would allow the state to reduce the overall corporate tax rate by 20 percent or more.

Each time state lawmakers carve out a special tax credit or implement policies that favor certain businesses or industries through the tax code or through regulation, they also harm other industries. An entrepreneur may have a great idea but decide it’s not worth it to compete with an industry backed by government handouts. Newer, more-efficient technologies may not be able to overcome the propped-up status quo.

The error of such tax breaks is compounded when one considers that they are effectively subsidizing many business activities that would have taken place even without the tax breaks. It’s corporate welfare that California doesn’t need and can’t afford.

In addition, the state is notorious for its lack of oversight of these tax policies. A Department of Finance analysis of state tax credits concluded that the legislative intent was “not specified” for 70 of the 82 tax expenditures reviewed.

Tax cuts clearly are desperately needed in California’s high-tax, high-regulatory business climate. Rates should be lowered as much as possible, but the rules should be applied evenly.

Eliminating the special tax breaks in the state’s tax code would allow California to significantly lower its burdensome business taxes, which would increase competition, business investment and economic activity. And that would give Gov. Brown a truly sustainable path to lifting California up.

Adam B. Summers is a senior policy analyst at Reason Foundation. Jon Coupal is chairman of the Howard Jarvis Taxpayers Foundation. This column originally appeared in the Orange County Register.