ORANGE COUNTY IN BANKRUPTCY : Economists Differ on Merit of Tax Hike

Two top economists agreed that Orange County’s bankruptcy will continue to harm the region’s economy, but they differed Thursday on whether a proposed half-cent sales tax increase would make it better or worse.

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In a debate sponsored by the nonpartisan Orange County Forum, Chapman University President James Doti and conservative economist Arthur B. Laffer tried to sway about 400 of the county’s top business leaders on how they will vote on Measure R.

Laffer told the group that shoppers and businesses would go to neighboring counties where sales taxes are lower. The proposed tax on Tuesday’s special election would raise the sales tax from 7.75% to 8.25%.

But Doti argued that “hidden taxes” and the legal fallout from rejecting the tax would hurt residents more than the estimated $150 per year the average household would pay if the measure passes.

The cost of defaulting on the $1.7 billion in debt that forced the county into bankruptcy in December would be worse than the sales tax itself, Doti said. Legal costs, the impact on the county’s credit rating and the inevitable and extended squabbling between bondholders being “stiffed” would be too high a price to pay, said Doti.

Doti, who recalled taking classes from Laffer at the University of Chicago, described himself as a tax hater in general. But, he said, “I truly believe that a half-cent increase in the sales tax is the least-cost way to get us out of the mess we’re in.”

He added, “Orange County has the potential of being known as the deadbeat county. By far the steepest cost paid by the county would be that paid by the effects of increasing uncertainty--kind of a cloud over Orange County’s head.”

Laffer, in his counter-argument, tried to convince the audience that raising taxes never works and, in this case, would lead to “the Los Angeles-zation of Orange County.”

Previous tax increases already have sent the county into the spiral of high unemployment and falling real estate values, Laffer said. Businesses and shoppers will merely run for the next nearest county, he said, joking that chambers of commerce in San Diego and Riverside counties had pressured him to change his position against the tax.

Laffer urged voters to change the government, although he did not offer details on how that should be done.

“Bailing out the government without changing the government itself is just asking for double damages,” he said. “Passing Measure R today removes the serious changes you guys should be doing in your county.”

Laffer said bondholders who stand to lose money in the bankruptcy if the county defaults should not expect county residents to pay for those losses.

“The people of Orange County did not cause this problem and they should not be held liable for this problem. . . . That is part of the risk of being an investor in this world,” Laffer said.

Doti responded by warning against the “seduction” of voting No on the measure, and said that Laffer’s argument would make sense only if voters had a choice about paying off the debt.