The Entrepreneurial View #460
Why Not a Little Economic Common Sense in California?
by Raymond J. Keating
Many people have complained over the decades that economists cannot agree on much. Indeed, you can usually unearth some economist somewhere willing to make authoritative-sounding statements that fly in the face of basic economic common sense.
But when sound economics governs, economists are usually pretty clear on a variety of matters and well worth listening to - especially if you happen to be a lawmaker who shapes public policy.
For example, policymakers in California desperately need to hear some economic common sense regarding taxes and health care.
On taxes, higher taxes mean increased costs for businesses and consumers, while resources are drained away from the private sector and funneled to government. Of course, government is far less efficient in the way it spends and invests compared to private entities. Higher costs and more waste is not a good economic combination.
On health care, a surefire way to make sure that health care costs accelerate quickly and that quality of care diminishes is to get the government more involved in health care. After all, when the government (i.e., the taxpayer) pays, consumers, providers, politicians and government bureaucrats have few, if any, incentives to care about costs. Eventually, rationing of care takes hold in the face of rising costs. So, the economics of government-run health care are pretty ugly.
These are some economic fundamentals about taxation and health care. They cannot be wished away by governors and state legislators. But that's exactly what lawmakers in California seem to be trying.
Many taxes in California are completely out of whack with the rest of the nation. Among these are extremely burdensome income, capital gains and gas taxes. But one area where California is in the middle of the tax pack is consumption-based taxes. Excluding the gas tax, California's state and local sales, gross receipts and excise taxes as a share of personal income ranked 29th among the states, based on 2004-05 data, the latest from the U.S. Census Bureau. But even such mediocrity would soon slip into failure if Democratic state legislators and Republican Governor Arnold Schwarzenegger get their way.
California lawmakers are considering major tax increases to pay for a government-run health care scheme. Businesses would have to provide health insurance or pay a payroll tax. The level of that tax is in dispute - with Democratic legislators pushing for a tax rate as high as 6.5%, and Schwarzenegger looking to cap it at 4%.
Hospitals would get hit with a 4% tax on revenue, and Democrats in the state legislature are pushing to jack up the state's cigarette tax from 87 cents per pack to $2.87 - a 230 percent increase.
So much for being the middle of the pack on sales, gross receipts and excise taxes.
Just a little economic common sense instructs lawmakers to give up on this misguided effort. The state's already shaky economy would suffer more if labor costs were jacked up due to a new payroll tax. Health care costs would get pushed ever higher due to both more government spending and the tax on hospital revenues.
As for the proposed cigarette tax hike, consumers, particularly low-income earners, would face increased burdens. Businesses - mainly small retailers - would get hit hard with higher costs and lost business (including to cross-border, Internet and underground purchases). In addition, more smuggling and other criminal activity, which in turn would have to be addressed by the police, would accompany such a large tax increase.
For good measure, since actual revenues rarely match expectations - especially given the long decline of smoking - and actual government spending always outruns original projections, other taxes eventually would have to be tapped to fund this massive expansion of government intervention in health care.
Economic common sense offers a clear verdict on this tax-and-spend health care plan in California - it's a big thumbs down. Hopefully, lawmakers will adopt some economic common sense. If not, the voters would have to do so at the ballot box, as the tax increases would need voter approval.
_______
Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.
This article may be reprinted with appropriate citation and credit.
