Dear Governor Newsom,
In early January, you released your proposed state budget for the next fiscal year. Thanks to a sustained economic recovery within the business community, the state has near-full employment and $78 billion more in total budget tax revenue since 2010–11. In fact, state and local tax and fee revenue has increased by more than $140.2 billion—state taxes and fees alone at a 73 percent increase—in just ten years. Local property taxes are expected to rise to $79 billion this fiscal year, of which $33 billion will go to schools, resulting in a record-high funding level of $17,964 per K–12 student in the current budget. And thanks to this increase in economic activity and tax revenue, the state is sitting on a growing balance of $38 billion in combined general and special fund reserves.
Yet in most parts of the state, working Californians aren’t feeling the same budget security.
Thanks in part to state income, sales, and gas taxes that are among the nation’s most burdensome, Californians have nearly the highest cost of living in the country and are starting an exodus from the Golden State as never seen before. According to the US Census Bureau, in 2018 about 190,000 more people left California than moved here—the second year in a row for a domestic migration loss, which is starting to signal a negative trend. And a recent Berkeley IGS poll found that half of likely voters admit to having given thought to leaving California, with 58 percent blaming the state’s high taxes as a driving force.
Our “stellar” unemployment numbers hide another issue. Since the end of the recession, California has mainly grown high-wage and very low-wage jobs while losing many jobs in manufacturing, construction, and other middle-wage industries. These blue-collar working-class jobs are critically important to California families, as they are some of the only opportunities available to earn middle incomes for those without a college education. The loss of these jobs is part of our exodus.
The cost-of-living crisis impacts business as well as families. Large, medium, and small businesses are now challenged in their efforts to attract, relocate, and retain a qualified workforce, hindering job expansion and additional tax revenues to our communities.
Our two-tiered economy has also created a more volatile tax structure that is dangerously susceptible to booms and busts. Right now, our state budget is heavily reliant on the top 1 percent of income earners, capital gains, and business taxes. As more of these individuals and businesses choose not to stay or expand in California, our tax revenue that we’re so dependent on will start to decline, and the services it funds will decline right along with it. According to new numbers by the Internal Revenue Service in 2018, the economic impact is over $8 billion dollars in taxable income.
The challenges are clear, even in the face of strong employment, huge budget surpluses, and great weather. So given these facts, why would anyone consider sponsoring or supporting the largest tax increase in state history? A tax increase that strikes at the heart of Proposition 13, the only taxpayer protections we have left in our state constitution?
Sacramento public employee unions and the Chan-Zuckerberg Initiative are planning to do just that—they are 100 percent committed to putting a $12.5 billion-a-year property tax increase on the November ballot. They claim businesses don’t pay their “fair share” in property taxes, and they are willing to undo Proposition 13 to make them pay.
Just how will this property tax increase exacerbate the cost-of-living crisis? Simply put, there isn’t a business or resident that won’t pay more if businesses pay more in property taxes. The public employee unions insist they have carved out an exemption for small businesses, but most small businesses do not own the properties on which they operate. They pay rent under a standard lease that passes on the property taxes and maintenance costs to the business as a condition of their agreement. The higher property taxes on businesses both large and small will ultimately get passed on to all Californians.
These are not big, monolithic corporations that will pay the price if this property tax increase passes. These businesses are the corner stores, small markets, and brick-and-mortar shops, like dry cleaners, that touch our daily lives while competing each day to stay in business, pay their employees, and build a legacy their owners can pass on to their children.
According to the latest data from the Harvard Business School, about 42 percent of new companies in California are founded by immigrants. Additionally, the California Latino Economic Institute found that nearly one-quarter of all businesses in California are owned by Latinos, representing the the fastest-growing component of the state’s economy.
But it’s not just businesses who will pay more. When their costs rise, businesses will be forced to charge more for the products we use every day. A current example is the increase in minimum wage to $15 an hour, which impacted restaurants, coffee shops, and eateries. Now you pay more every time you dine or purchase a cup of coffee. Under this property tax increase, everything we buy from businesses will get more expensive—from groceries, diapers, and clothes to utilities, daycare, and prescriptions. These aren’t luxuries. These are simply the basic necessities.
Make no mistake, the public employee unions know full well it is consumers (including their own union members) who will pay the costs of this historic tax increase, but their desire to eliminate Proposition 13 outweighs any concern for the families who will be forced to make financial sacrifices due to the long-term impact of these increased costs.
Thanks to the business community, high-income earners, and our economy, California has been the recipient of an unprecedented increase in tax and fee revenues. If state policymakers focus on policies that can help sustain our job growth, attract companies, and address our challenges, then we can continue to grow revenues that fund education and other services long into the future. But if policymakers focus on short-sighted tax increases, including increased property taxes, then it will directly hurt our job growth, future investment, and ultimately the state revenues that the budget relies on. A historic $12.5 billion property tax increase on top of the $38 billion in combined general and special fund reserves that we are currently sitting on is a giant leap in the wrong direction for all Californians.
Governor, we simply ask that you do not go along with this tax increase—for the sake of California businesses and taxpayers who all stand to lose if we go down the ruinous road of higher property taxes.
Originally published in Eureka, Hoover Institution Magazine https://www.hoover.org/research/request-governor-best-way-raise-revenue-allow-businesses-create-new-jobs-not-support