California Is Ripe for Revolt Again : Raising taxes has not brought in more revenues, and the gubernatorial candidates would be wise to learn that lesson.

As the California governor’s race heads to the finish line, Kathleen Brown’s campaign staff is dazed by her drop in the polls. They have taken hope in the story of New Jersey Gov. Christine Todd Whitman who just a year ago snatched victory from the incumbent, Jim Florio. Whitman had been trailing in the polls only a week before the election. The reason Brown’s staff believes that the Whitman/Florio example is appropriate is because Florio can be compared with Gov. Pete Wilson, both of them unpopular because they dramatically raised taxes.

Brown may like the way the Whitman story ended, but she hasn’t followed the Republican’s model. Whitman’s issue that turned the electorate around and led to her victory was a proposed across-the-board income tax cut. Brown has not, as of this date, called for a tax cut to invigorate California’s depressed economy.

Unlike Florio, Wilson has admitted the tax increases were an error. In fact, he has quite accurately called those tax increases the biggest mistake of his first term. He still has plenty of time to punctuate that mea culpa by following Whitman’s example and declaring for a tax cut early in his second term.

The candidate who first calls for a serious across-the-board tax cut would very likely repeat Whitman’s electoral success. And the real beneficiaries would be all of us in California.

Right now, California is ready for another tax revolt. From 1980 to 1989, following California’s fabled Proposition 13 tax revolt, state and local revenues increased 55% in real terms, well above the national average of 40%. State and local budgets were solvent. California’s unemployment rate fell below the national rate for most of the 1980s.

In 1990, California began the second stage of the great tax experiment, only this time California was increasing taxes. Starting with the gasoline tax increase of 1990, and then followed by income, sales and other tax increases of 1991, the Golden State’s taxes were increased with no less gusto than they had been cut 12 years earlier. This was the largest one-year state tax increase in U.S. history.

As a consequence, California has lost its competitiveness with other states and the state’s economy is in disrepair; personal income has fallen relative to the rest of the nation and employment is still below its June, 1990, peak. Based on the trend of job gains in the 1980s, California is currently 2 million jobs below expectations. But even more surprising for some, the state budget has been in a perpetual state of crisis since all the tax increases took place.

The next governor of California should take an eye-opening look at what happened to tax revenue after the tax cuts of 1978 and the corresponding tax increases of 1990-91.

California’s general-fund revenues were about $15 billion in 1978. Within a decade, they had soared to about $37 billion. However, following the tax increases of 1990 and 1991, California’s general-fund revenues dropped for the first time in 50 years. Despite a record tax increase projected at more than $7 billion, the general fund ended with less money than it had the year before.

The tax increases were not the only reason for California’s misfortune, but they played a major role. What is surprising is that the increases were misunderstood by the lawmakers and bureaucrats who supported them.

Consider the logic expressed by California’s budget writers in the May, 1992, budget revision: “Showing the worst growth in decades, personal income tax revenues for the 1991 tax year appear to be nearly 2% below the year earlier, despite the tax increases enacted last year. If not for these law changes, revenues would have declined nearly 7%.” The budget personnel got the wrong message.

The budget forecasters ignored the feedback effect that income-tax rates have on income and then on revenue collections. They believed that the tax increases prevented an even greater revenue drop; they never considered that the tax increases could be a cause of the fall in revenues. According to their logic, at 100% tax rates the state would collect a lot more revenue.

For Califorinia, it is time to reverse the trend of this sloppy thinking and snap the locks that keep our economy tied down.

Kathleen Brown or Pete Wilson could lead the state back to economic health by proposing and following through with serious across-the-board tax cuts.