To Bolster California’s Recovery, Lower the State and Local Tax Burden : Economy: The corporate bite is 60% above the national norm and the West’s highest, while competitor states are booming.

California’s economic recovery is well under way. But a major source of California’s growth in the 1980s--the revolution in computers and communications--has made businesses across the country footloose: The new plant need not be near the old one; the plants need not be located near the corporate headquarters. States are competing more and more to attract new enterprises and keep the pieces of the ones they have.

In this environment, California’s high taxes put it at a disadvantage. The tax on corporations, at 9.3%, is the same as Arizona’s, but higher than that of New Mexico (7.6%), Oregon (6.6%) and Utah (5%). The state of Washington? Zero. Nevada? Zip. Texas? The same.

In corporate tax dollars collected per $100 of personal income (the relative measure that’s usually used), California is fifth in the nation, first among its Western competition and more than 60% above the 50-state average.

The competition is tough on the personal income-tax score. Washington and Nevada have no tax on personal income (neither does Texas). California imposes a tax of up to 11% on personal incomes, the highest marginal rate (although scheduled to decline to 9.3% Jan. 1, 1996) of any state except Massachusetts and Montana. In dollars collected per $100 of personal income, California was 15th in the nation in 1993--27% above the 50-state average. The overall tax burden per household in California is 19% above the national average.

There was a time when economists found no relationship between state taxes and economic growth. State and local taxes were low enough to be swamped by other important influences--labor availability, infrastructure and so forth. But the state and local tax burdens have risen steadily and are increasingly becoming a significant cost to business, either as a tax on profits or through their influence on the cost of labor.

More recent studies show that states that have cut their tax burdens have stronger economic growth than those that have increased them. The changes in tax burden seem to signal a favorable or a hostile environment, what the executives making locational decisions call the “tax climate.” And the tax climate ranks second only to labor availability and labor costs (which are themselves affected by taxes) in determining location.

The danger for California is the possibility that the recent economic upturn is merely a cyclical upswing, not a strengthening of the basic economic structure. The communications revolution has made it easier for the structure of an economy to change--easier for new enterprises and new jobs to move in, but also easier for them to move out. Thus the decline in the national defense budget is not fatal for California; with appropriate policies, California, with all its other advantages, can attract new businesses. In the same way, it can lose more than its defense industries.

In the year ending this past September, California ranked 49th among the states in growth in non-farm employment, actually losing jobs while its Western competition added them. Non-farm employment increased 6.7% in Utah, 6% in Nevada. New Mexico was up 5.2%, Arizona 4.4% and Oregon and Texas 3.1%

All of these states have tax burdens less than California’s. If California is to compete effectively, it must lower its tax rates significantly.