California Ballot Attacks on Small Business
Everybody loves small business – don’t they? Apparently not in California.
Two initiatives appearing on the November 2 California general election ballot take direct aim at entrepreneurs, small business owners and those who provide critical capital for entrepreneurial ventures.
Proposition 63 calls for imposing a 1% income tax on earnings over $1 million. The revenues would be used to increase spending on mental health services. A ballot measure like this is class warfare at its most blatant. However, class warfare never makes for good policy and is always bad economics.
California already inflicts one of the most onerous income tax rates in the nation at 9.3%. Pushing that to 10.3% would make it the highest rate among the states.
Americans for Tax Reform has noted: “Because more than two-thirds of top bracket filers are small business owners, the ‘millionaire tax’ is really a small business tax.” Small businesses, of course, are a key source of innovation in the economy, and create the bulk of new jobs.
It needs to be recognized that this tax rate also applies to interest, dividends and capital gains. Higher taxes on investment and entrepreneurship discourage such risk taking. Reduce the potential returns, and you’ll get less of such crucial activities.
In fact, increasing the income tax would send a clear signal to entrepreneurs and investors that they should do business elsewhere. California already is quite hostile to small business. For example, in the most recent edition of the Small Business Survival Committee’s “Small Business Survival Index,” which ranks the states according to their policy climates for small business and entrepreneurship, California ranked a pathetic forty-sixth.
As if this weren’t bad enough, the potential news for small businesses on the November 2 ballot gets worse. Proposition 67 calls for a 3% tax on telephone use in California. The tax would be capped at 50 cents per month on residential bills, but there would be no cap on cell phone or business lines. The revenue would go towards emergency medical care.
Telecommunications services obviously are critical to businesses in the twenty-first century. Again, does it make any economic sense to raise the costs of doing business in the Golden State?
Supporters of ballot measures that hike taxes like to talk about all the wonderful things government will do with the money. After all, who could be opposed to helping mental health and emergency care? But in reality, government revenues are fungible. And when government grows as big as it is in California, additional revenues gained from higher taxes are, for the most part, wasted.
At the same time, proponents of measures like Propositions 63 and 67 either are ignorant of or do not want to talk about economic reality regarding the ill effects of higher taxes on entrepreneurs and small businesses, and therefore, for the state’s economy and job creation.
The last thing California should be looking to do is raise taxes. Instead, the state should be aggressively pursuing ways to provide much-needed tax relief. In particular, the state’s onerous personal income tax rates need to be substantially reduced. Rather than jacking up the capital gains tax, why not follow the lead of eleven other states by eliminating this anti-growth, anti-investment, anti-entrepreneur levy? For good measure, the state’s corporate income tax is far too high.
California’s ongoing budget challenges spring from two basic problems. One is that government spends too much money. The second is that high taxes weigh heavily on the economy. Propositions 63 and 67 will only make matters worse. From a small business perspective, budget woes and ballot measures to increase taxes take much of the entrepreneurial shine off the Golden State. Let’s hope the voters reject these tax increases, while state lawmakers get serious about pro-growth tax relief.
Raymond J. Keating serves as chief economist for the Small Business Survival Committee.
