Refund checks are not the right way to help California taxpayers

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Like most Californians, any day now my bank account will be boosted by the tax relief passed by the legislature earlier this year. Governor Gavin Newsom’s office enthused on Oct. 6: “Beginning tomorrow, $9.5 billion in middle-class tax refund payments will begin flowing to Californians, with refunds of up to to $1,050 that will benefit millions of eligible Californians under the largest program of its kind in the state. the story.”

The program will send about 8 million direct deposits and 10 million debit cards. Refunds will also go to illegal immigrants.

Any refund of my hard-earned taxes is welcome, especially in this severely overtaxed state. But Newsom’s explanation shows why that’s not the right way to help taxpayers.

“We know it’s expensive right now, and California is putting money back in your pocket to help out,” he said. “We’re sending out refunds worth over a thousand dollars to help families pay for everything from groceries to gas.”

But that’s a short-sighted way to help people. Although the extra money will help somewhat, it will not change the behaviors needed to help the overall economy. That’s because it’s a one-time deal.

The $100 billion surplus, or at least the $9.5 billion used for these tax refunds, should have been used to restructure the tax code to encourage investment in the creation of new businesses and jobs. These new businesses and new jobs in turn broaden the tax base. And a broader tax base actually increases tax revenue.

In other words, although tax rates go down, tax revenues go up. A big reason is that businesses and the wealthy stop leaving the state. They stay here, grow bigger and pay more taxes.

Let’s look at “Budget 2022-23: May Revenue Outlook” from the Office of the Legislative Analyst. For what are known as the three big revenue streams, it forecast, for the 2022-23 fiscal year, which began on July 6:

Revenue outlook, in billions

  • Personal Income Tax $140.9
  • Corporation tax $34.8
  • Sales tax $33.3
  • Total $209.0

One more thing. The “Big Three 2022-23 Revenue Outlook Updates,” just released on Oct. 10, estimates revenue will be $5 billion below the May projection. Not a huge amount, so we can skip that here.

Now, a better way to pay back that $9.5 billion to taxpayers would have been to cut — permanently — one of the big three taxes by that amount. For example, personal income tax, whose revenue is projected at $140.9 billion, could have been reduced by $9.5 billion, to $131.4 billion.

This would have represented a 6.74% reduction in tax revenue. Most middle class taxpayers are now in the 9.3% tax bracket. Then reduce this rate by 6.74%. Here is the formula: 9.3 – (0.0674 * 9.3) = 8.67.

You get a new middle class tax rate of 8.67%. A reduction of 0.63 percentage points from the current rate of 9.3%. It is substantial.

If your middle-class family income tax payment is $7,000 a year, you’ll save $474 a year, every year. Again, the cut should be permanent, not just for a year.

Alternatively, corporate or sales taxes could be reduced. Leave corporate tax aside as it would be seen as “helping the rich”.

A client walks into a Block Advisors tax preparation office in San Anselmo, Calif., on April 15, 2019. (Justin Sullivan/Getty Images)

For sales tax, state collections are expected to be $33.3 billion per year. According to the California Department of Tax and Fee Administration, as of October 1, the statewide sales tax rate is 7.25%. Local jurisdictions can add to this. But we’ll stick to the state part.

We will once again reduce the amount of the tax by $9.5 billion. Thus, sales tax revenue of $33.3 billion would drop to $23.8 billion. And this reduction of $9.5 billion represents 28.5% of the $33.3 billion.

So we could reduce the state’s 7.25% sales tax rate by 28.5%. (7.25 * 0.285 = 2.07). We then reduce the 7.25% rate by 2.07 percentage points. Which equals: 5.18 as the new sales tax rate.

Cutting 2 percentage points off all purchases – permanently, again – would save everyone money on their budget. It would be money in their “pockets”, as the governor puts it. Even better, it would be money they could invest and depend on investing for years to come, as the reduction would be permanent. Or companies could invest the savings in creating new jobs.

This is also the method behind President Reagan’s 1981 tax cuts, which reduced the top federal tax rate from 70% to 50% in 1983; and further to 28% in 1986. This energized the US economy and ended Jimmy Carter’s “malaise” economy of the 1970s, characterized by stagflation – stagnation plus inflation.

Similar federal cuts now would pull us out of the current stagflation. But at the state level, they would mostly help the California economy.

Admittedly, this means going through the above logic. But we did it at the federal level in 1981. I remember the time well, because I left the United States Army in February 1982 and went to Washington, D.C. to resume my career as a journalist when everything it was happening quickly. People got it and it worked. Economic growth was 7% in 1983.

It can be done. Maybe next year.

The opinions expressed in this article are the opinions of the author and do not necessarily reflect the opinions of The Epoch Times.

John Seiller

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John Seiler is a veteran California opinion writer. He has written editorials for The Orange County Register for nearly 30 years. He is a United States Army veteran and former press secretary to California State Senator John Moorlach. He blogs at JohnSeiler.Substack.com

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