California Business Climate:
State's Tax Climate Will Worsen if Tax Hikes on November Ballot Pass, Group Says

A new study of state business tax climates found that if voters approve either Governor Brown's personal income and sales tax increase (Proposition 30) or Molly Munger's personal income tax increase (Proposition 38) next month, California's business tax climate will worsen and the state will have a tougher time attracting and retaining jobs.

The Tax Foundation's 2013 State Business Tax Climate Index survey of all 50 states ranks California's tax structure 48th – worse than all the other states except New Jersey and New York.

The study noted that Proposition 30 and Proposition 38, if approved, will "reduce California's score in individual tax and overall." The report states: "No definitive claims can be made about how a particular change could affect a future ranking because other states may improve or damage their business tax climates in the meantime and further changes may take place within these states."

The report states: "The evidence shows that states with the best tax systems will be the most competitive in attracting new businesses and most effective at generating economic and employment growth."

The Tax Foundation report analyzes each state's tax structure, and scores are based on individual income tax, sales tax, corporate income tax, property tax and unemployment insurance tax.

California's best scores were in the property tax (16th out of 50) and unemployment insurance tax (17th out of 50). The state's corporate tax is 45th, the individual income tax 49th, and the sales tax 40th.

The Tax Foundation, a nonpartisan group based in Washington, D.C., concluded that lawmakers need to consider two things when making changes to a state's tax structure:

Taxes matter to business. Business taxes affect business decisions, job creation and retention, plant location, competitiveness, the transparency of the tax system, and the long-term health of a state's economy. Most importantly, taxes diminish profits. If taxes take a larger portion of profits, that cost is passed along to either consumers (through higher prices), employees (through lower wages or fewer jobs), or shareholders (through lower dividends or share value). Thus, a state with lower tax costs will be more attractive to business investment, and more likely to experience economic growth.

States do not enact tax changes (increases or cuts) in a vacuum. Every tax law will, in some way, change a state's competitive position relative to its immediate neighbors, its geographic region, and even globally. Ultimately, it will affect the state's national standing as a place to live and to do business. Entrepreneurial states can take advantage of the tax increases of their neighbors to lure businesses out of high-tax states.

October 19, 2012
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