After three straight years of record state budget growth, inflation and higher interest rates are bringing state finances back down to earth. The good news is prudent budgeting by state leaders has created healthy budget reserves and resisted expensive, long-term spending obligations. We are not facing a budget “crisis” — yet.
The bad news is some legislators believe tax increases should be the preferred alternative when revenues slow down.
We disagree.
The California Senate released a budget plan earlier this month that proposes a $7 billion business tax increase to maintain state budget spending for education, safety net services, and public safety programs. While we may agree with some of the spending priorities announced by the Senate, we do not believe now is the time for a multibillion-dollar tax increase on our community’s economic engines.
The Senate proposal would subject certain businesses to a 10.99% corporate income tax — the second-highest rate in the nation. High corporate tax rates put California companies at a tremendous competitive disadvantage. The 49 other states would benefit from California’s decision to make itself less attractive to employers.
A thriving economy is the best source of revenue for important government programs. However, chasing jobs away would hurt the state’s bottom line rather than helping working class families. The United States recognized its corporate tax rates were among the highest in the developed world, outpacing rates in the European Union and elsewhere.
California is competing globally to attract and retain investment and employers. Increasing the corporate tax rate when the rest of the world is reducing rates is counterproductive. It fails to recognize this trend in taxation, putting California out of step with the economies that are looking to lure California investors and jobs.
A 2021 study by the Washington, D.C.-based Tax Foundation found the corporate tax falls predominately on labor and that for every increase in the corporate tax rate, retail prices are increased. A tax increase on business impacts individuals through less economic growth, lower wages, higher prices, fewer jobs, and decreased returns in retirement accounts.
These taxes would be detrimental to California as the state fights off the prospects of an economic downturn. Voters in 2014 approved a constitutionally protected rainy-day reserve to backstop the state budget. During good times, the Legislature and the governor deposited more than $30 billion in the rainy-day reserve. One of Gov. Gavin Newsom’s strategies to address the revenue slowdown is to stop adding to the rainy-day reserves. Even while proposing a $7 billion tax increase, the Senate plan proposes adding another billion dollars to reserves.
California is an expensive place to do business, between the high cost of living, taxes and regulatory climate. We also enjoy great benefits with a skilled and educated workforce, unmatched innovation and access to global markets. However, we should not take lightly the competitive environment our companies must operate in; further undermining of our investment climate will inevitably damage prospects for job growth and economic stability.
Increasing taxes will send the wrong signals to job creators and investors in the state’s economy. Now is not the time to test California’s ability to withstand the impact of an economic downturn or a recession by placing our economic success at risk.
Blanca Rubio represents the 48th Assembly District. Paul Granillo is president and CEO of the Inland Empire Economic Partnership.
