Guess What? California’s Tax Increases on the Wealthy Didn’t Slow Job Growth

June 25th, 2014  |  by  |  Published in Budget and Tax Policy, NJPP Blog: As a Matter of Fact ...

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An edited version of this blog appeared as a letter to the editor in the June 26, 2014 edition of the Star-Ledger.

We’ve heard a lot in the past few weeks about how increasing taxes will harm New Jersey’s economy, make the state less competitive and put the brakes on already slow job growth. As NJPP has pointed out time and time again, these assertions are just that – assertions – that are built on a foundation made not of facts, but of flawed economic theory.

The recent experience of California is yet another piece of evidence that proves our larger point: state and local taxes are a small and relatively unimportant piece of the economic-growth puzzle. Since these taxes make up less than 5 percent of an average company’s cost, it’s no surprise that they aren’t actually as important to business decisions as many in Trenton would have the public believe.

In 2012, California voters decided that rather than continuing to disinvest in the state’s vaunted schools, they would raise taxes on all residents, but mostly on the very wealthiest Californians.

Before California’s new tax plan took effect in 2013, the state’s income tax structure, like New Jersey’s, was already quite progressive. The top state income tax rate of 10.3 percent was applied to taxable incomes over $1 million, higher than New Jersey’s top rate of 8.97 percent on income over $500,000.

The plan approved by voters expanded the 10.3 percent rate to income between $250,000 and $300,000 and created three new tax brackets: 11.3 percent for income between $300,000 and $500,000, 12.3 percent for income between $500,000 and $1 million and 13.3 percent for income over $1 million.

The income tax increases, combined with a small sales tax increase, are estimated to bring California at least $6.8 billion in additional revenue a year, which will be invested in the state’s K-12 schools and community colleges.

While Californians were subjected to the same doomsday predictions that follow these kinds of proposals like bees follow honey, the early results show no evidence that the tax increases slowed the economy. In fact, despite these tax increases – which were far broader and sharper than what’s being considered by New Jersey policymakers – job growth has taken off.

California ranked third in job growth in 2013, with a rate (2.9 percent) far higher than the national average of 1.8 percent.

Journalist David Cay Johnston takes a look at the county-by-county jobs data for 2013 in a new column, revealing even more evidence that taxes are not the last word on job creation:

Just three California counties accounted for every 16th new job in America last year. Los Angeles County added 76,600 jobs. Santa Clara County, the heart of Silicon Valley, added 38,200 jobs. And San Diego County added 37,000 jobs.

Add in Orange County, the rich suburban area between LA and San Diego, and every 13th new job in America was created in just four counties.

America has 3,144 counties and what the demographers call county equivalents. So about a tenth of 1 percent of counties accounted for more than 6 percent of job growth in America last year.

In summarizing, Johnston clearly makes the case we’ve been making here in New Jersey. It’s worth quoting.

“To be sure, not all of the job growth in America took place in areas with high taxes or increased taxes. Nor am I arguing that higher taxes mean more jobs. But statements that higher taxes must or do destroy jobs are not supported by the facts,” he writes. “When it comes to job growth, nearness to markets, reliable electricity and transportation for goods as well as a large labor pool with skills needed by specific industries may be much more important than tax rates or marginal tax-rate increases.”

To that we’ll just add: Amen.


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