California’s biggest problem is its high cost of living – accurately described as an affordability crisis – but many “solutions” proposed by politicians are tax increases that would only make things worse.
A recent Public Policy Institute of California poll found that 44 percent of Californians rank the cost of living as their top concern, far outpacing any other issue (“housing cost and availability” was a distant second, at 14 percent).
Anyone who has purchased groceries, filled up the gas tank, or paid rent or utilities in recent weeks might be surprised that more people didn’t rank affordability as their top issue.
However, the affordability challenge that everyday Californians face doesn’t seem to have reached Sacramento.
For example, Governor Gavin Newsom’s budget proposal includes $14.25 billion in new taxes annually, including taxes that would increase the cost of software downloads and the modern tools that businesses rely on to keep their doors open.
At first glance, it may sound like a narrow tax on technology. But a closer look shows it would reach far beyond the tech sector and quietly increase costs throughout the economy, making life more expensive for California families.
Consider your local grocery store. It may use taxable software for payroll, inventory, security, payments, accounting, employee scheduling, and online ordering. Its delivery company may use taxable logistics software. Its vendors may use taxable billing, compliance, and supply-chain systems. Each business in the chain would face Newsom’s tax hike and pass the added cost forward.
By the time your family buys groceries, diapers, school supplies, or household basics, those software taxes are embedded in the final price of what you pull off the shelf – even if your family never sees a line item for “software tax” on a receipt.
In total, state lawmakers proposed increasing taxes and fees more than $805 billion a year, the California Tax Foundation’s latest Tax and Fee Report shows. For perspective, all of the state’s current taxes combined will generate $313 billion during the current fiscal year.
Tax hikes on employers are usually pitched as ways to make them “pay their fair share” – a tired cliché that ignores the tax increases already imposed on employers in recent years, including payroll tax hikes and a retroactive tax increase on many corporations.
California has been increasing taxes while other states were reducing taxes to make themselves more competitive for jobs and investments.
If California’s latest tax hikes are approved, businesses that can’t pass the taxes to consumers will look for other ways to mitigate the cost, such as eliminating jobs or moving to lower-tax states – options that are bad news for those of us who love our state and are fighting for a more affordable California for the next generation.
The same poll that revealed Californians’ concerns about the cost of living found that they also understand that taxes are a major contributor to the strain on their budgets.
The Legislative Analyst’s Office recently reported that California’s state revenue is $25 billion higher than previously expected, largely because of California’s innovation economy.
Yet, California is also threatening to shut down what has been driving investment in innovative job growth: the research-and-development tax credit. To claim an R&D tax credit, a business has to spend money in California on “qualified expenses,” and the biggest qualified expense often is payroll for engineers, software developers, scientists, researchers, and lab technicians. These are California workers who will be in the unemployment line, or be asked by their employer to relocate, if the governor’s proposal to restrict the R&D credit goes through.
By attracting and retaining jobs, the state can strengthen its revenue and create more jobs for Californians.
The clear first step is to avoid increasing taxes that would make California even less affordable.
Robert Gutierrez is president of the California Taxpayers Association