With the election now in the rear-view mirror, the media has shifted its attention to the pending “fiscal cliff.” This refers to a combination of automatic federal tax increases and spending cuts that most economists say will push the United States back into an economic downturn (and maybe even another recession) next year if they are not averted before the end of this month.
But for Californians — and California business owners, in particular — the fiscal cliff might better be described as an abyss.
Along with all Americans, we are facing the potential expiration of the Bush tax cuts. This will increase marginal tax rates for the top two income brackets, phase out exemptions and deductions for taxpayers in those brackets, and raise the tax rate on capital gains and dividends for everyone.
In addition, a new 3.8 percent investment surtax will kick in next year for upper-income individuals and couples, thanks to Obamacare. And, of course, Proposition 30 will raise the California sales tax by a quarter of a cent for four years starting next year and increase state income taxes for anyone making at least $250,000 a year by up to three percentage points for seven years.
This additional tax is retroactive to the start of the 2012 tax year, by the way, so prepare to deal with it this coming April.
Locally, we have the city of L.A. gross receipts tax. The Los Angeles Area Chamber of Commerce called this the “No. 1 tax complaint of L.A. businesses” and noted that the city of Los Angeles has the highest gross receipts tax rate in Los Angeles County and one of the highest in the nation.
In addition, the Los Angeles City Council recently voted to ask residents to boost the local sales tax by another one-half percentage point. If voters approve this increase in March, our city’s sales tax (at 9.5 percent) will become the highest among the nation’s 10 largest cities (we would be tied with Chicago).
Given the relatively wide margin (eight points) by which Proposition 30 passed, it would appear that Californians are prepared to bite the bullet and pay ever-higher taxes in an effort to get our state’s finances under control. But are higher and higher taxes, with literally no end in sight, really the answer to our fiscal problems?
Real-world experience — and frankly, just a little common sense — would suggest that the answer is an emphatic “no!” This is especially true when we’re talking about raising taxes on upper-income individuals.
Political rhetoric like “making the rich pay their fair share” might sound nice and even help win elections. But, unfortunately, raising taxes on upper-income individuals does very little, if anything, to help grow the economy or reduce debt and deficits in the real world. In fact, it usually results in just the opposite.
Demonized by politicians
Just think about it for a minute: Who actually creates the jobs that are critical to turning the economy around? Middle-income wage earners? Poor people who are living on government assistance?
Of course not. New businesses and jobs are created primarily by the upper-income individuals who have been so demonized by many politicians.
These “evil rich people” just happen to primarily be the entrepreneurs and business owners who make decisions about where to start and locate their companies, how much new real estate and equipment to buy, and how many employees to hire.
Will they choose to start, grow and expand their businesses in a city or state (or nation, for that matter) where entrepreneurship is encouraged through low tax rates and minimal government regulation? Or where tax rates are high and government red tape and bureaucracy are overly burdensome?
Unfortunately, a report recently published by the Manhattan Institute, “The Great California Exodus: A Closer Look,” does not paint a pretty picture for our state.
Due to high taxes, burdensome regulations, lack of public-sector reforms and a lackluster job climate, more people have left California than moved here since 2005. California is no longer “perceived by most Americans as the land where dreams come true,” the report concludes.
The report states that since 1990, almost all of the net migration into California over the preceding 30 years (4.2 million people) has been wiped out as people and businesses relocated to states with better economic climates, lower taxes and less government regulation.
“More often than not, people move because there is a better opportunity elsewhere,” the report states. “Families looking for economic opportunity travel to Texas now,” where the economy has been booming. Those families once traveled to California, but no longer, according to the report, because companies “set up shop where conditions are more conducive to making a profit.”
As an L.A. entrepreneur, it hurts me deeply to read statistics like these. I strongly believe in the future of our great state, but I do not see ever-higher taxes as the solution to our financial problems.
To the contrary, I see them as exacerbating the problems. Let’s change our fiscal course right now — before it’s too late — and restore California to its rightful place as one of the greatest and fiscally sound states in the nation.
Arthur F. Rothberg is the managing director of CFO Edge, a provider of outsourced CFO services in Pasadena.
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