To Solve the State Deficit, Encourage Economic Growth

With California’s state government facing a huge gap in its budget, Sacramento is seeking new revenue through tax increases. Meanwhile, President Bush and the Congress will offer another approach: encouraging economic growth.

Gov. Gray Davis is preparing a spate of new and increased taxes, potentially covering everything from cars to movie tickets to health clubs to new income taxes on middle-class workers. Already Californians labor under the nation’s 10th-highest tax burden. But Sacramento seems intent on being No. 1.

This is unfortunate and unnecessary, because California’s recent history provides the clearest example that a growing economy, not higher rates, is the greatest generator of government revenue.

In 2000, our prosperous, high-tech economy helped push capital gains tax revenue up to $17 billion. This year, state officials estimate the tax will bring in less than $5 billion. Tax revenue did not fall because Davis cut taxes -- he didn’t. Tax revenue is down because the stock market is becalmed, and the incentives for investment and job creation are all to be found in other states.

California’s budgetary fall from grace has two main sources: extraordinary spending stemming from electric rate subsidies, and a falloff in tax receipts. The massive goof in handling the electricity crisis, which precipitated much business flight from our state, presumably won’t be repeated. As for the decline in state tax collections, most is directly attributable to a drop in capital gains associated with the stock market decline.

Governments can’t tax what doesn’t exist. To collect more revenue, we have to rekindle the market and grow the economy, the source of all tax revenue.

In Washington, the leaders in Congress and the administration are pursuing a pro-growth agenda. The Republican majorities in Congress will soon introduce legislation to make permanent, and perhaps accelerate, the Bush tax cuts of 2001, which are only now being phased in. The new legislation will include a permanent repeal of the Death Tax, a proposal I first introduced in 1993 and which is estimated to add more than $10 billion to the U.S. economy in the next decade.

To encourage savers to return to the market -- and to provide the capital necessary for job creation -- the White House also is supporting legislation I wrote to repeal the unfair double tax on dividends. Unlike most of the industrialized world, the United States taxes earnings from stocks twice: once at the corporate level, and then again when those same earnings are distributed to shareholders.

According to the Treasury Department, the double tax on dividends costs the economy as much as $25 billion per year -- while repealing it would add up to half a trillion dollars in corporate capital. The private, nonprofit Center for Data Analysis forecasts that ending the double tax on dividends would add $2.2 trillion to the U.S. economy over the next decade. That is $20,000 for each U.S. household.

There’s another good reason for Californians to stop sending so much money to Washington. With more than 12% of the nation’s population but only 2% of the votes in the Senate -- the same as Rhode Island -- California is routinely shortchanged when it comes to federal spending. In 2001, California’s tax-versus-spending imbalance worsened to a record $47 billion. California is enduring its 15th straight year as a tax donor to the rest of the nation, and the prognosis is for an endlessly worsening hemorrhage.

In the House, where we have full voting strength, the Orange County delegation has more often been able to win the federal funding our region deserves, and occasionally those successes have survived the House-Senate conference process.

But lately, even when we have won significant new federal funds for California, the budget black hole in Sacramento has eaten them up. The worst example of this is the record-high increase in funding that my colleagues and I worked hard to provide to California’s schools. Of the $5.4 billion from Bush’s No Child Left Behind Act and the 2002 budget, a substantial portion has been hijacked for other purposes.

Davis announced Dec. 6 that he would cut $3.1 billion in school funding for the next 18 months. Along with an $850-million cut for fiscal 2001 and 2002 announced earlier, Davis has eliminated nearly $4 billion in education funding. This is occurring at the same time the federal government has provided the largest increase in money for California schools in history. There can be no better illustration that our state’s policy of taxing growth is a vicious cycle.

I will continue to work in Washington for pro-growth policies that spur tax revenue, and for a fair return on our tax dollars through federal spending. But until our state government understands the imperative of economic growth, California’s full recovery will remain elusive.

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Rep. Christopher Cox (R-Newport Beach) is chairman of the House Policy Committee.