President Reagan famously quipped that “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
Though made four decades ago, these remarks have become pertinent once again. For Californians, federal and state politicians and regulators have been failing us for several decades now. These failings are driving the economic malaise hanging over the state.
To see why, let’s start with tax policy. Californians already pay the highest tax rates in the country. Passing Prop. 3, which would make California’s highest state income tax rates permanent, or Prop. 40, which is the proposed wealth tax, will make this problem even worse.
And it’s not just the rich paying an excessive tax burden. Everyone pays the state’s 7.25% sales tax rate (plus local rates that take the rate up to around 9% on average). Then there are the high excise tax rates that push up the costs of gasoline and electricity. All things considered, Californians’ higher-than-average household incomes look less impressive once families have paid off their state tax bills.
But taxes aren’t the only policy driving down Californians’ effective incomes. The second stage of government action according to President Reagan—regulating the economy—also shrinks Californians’ effective incomes.
When Californians fill up at the gas station, charge up their cars at home, or turn the lights on, they are paying some of the highest prices in the country. Why? It’s the state’s burdensome energy policies, which include cap-and-trade regulations, solar mandates, and the low-carbon fuel standard.
Beyond energy, Californians also face the highest average housing costs in the country thanks to excessive zoning and environmental regulations. The higher costs of doing business in the state due to excessive regulations, such as strict worker classification rules and a burdensome minimum wage, inflate residents’ cost of living even more.
The reality that California’s economy continues to grow despite these burdens is a testament to the state’s competitive advantages, including Biotech Beach, Silicon Valley, and Hollywood. A lesser state might have folded under the weight of California’s policies.
Unfortunately, President Trump is creating more headwinds for the Golden State (and the nation as a whole) by embracing “government’s view of the economy” as well. Rather than high income taxes, the President favors tariffs. But tariffs are taxes that adversely impact domestic consumers and producers just like any other tax.
Take a 50% tariff on Canadian alcohol imports, which may or may not be in effect at any given moment. If effective, the cost for consumers to purchase a $30 bottle of Crown Royal will be higher. A study by Federal Reserve economists found that 90% of tariff costs are passed along to consumers, which means that $30 bottle of whiskey would cost $43.50. The exact same dynamic holds for all consumer goods.
The same goes for businesses when they purchase steel, car parts, or any other goods impacted by tariffs. Businesses, now facing higher costs, will have to either charge consumers more (worsening their affordability problems), pay workers less, or see their profits decline. In many instances, it’s all three. The one certainty is that businesses are in a weaker competitive position today than they used to be.
Due to these dynamics, California families are now caught between slowing income growth and rising costs, which is one reason consumer sentiment remains tenuous. And we haven’t even talked about Reagan’s final stage—subsidies.
For California, Gov. Newsom focuses his subsidies on clean energy products like electric vehicles and favored laundry appliances. For Trump, it’s biofuels and semiconductors.
The problem, of course, is that businesses need subsidies to offset the costs of ill-advised regulations, or the government is overriding consumer choices by propping up its favored industries. Either way, the government is throwing taxpayers’ hard-earned money at ineffective businesses. Such a strategy rarely ends well.
Ironically, as the inevitable economic problems from these poorly designed government programs arise, the typical response is to create even more government programs. Instead, the government’s mantra should focus on doing better with less.
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Rather than considering wealth taxes or permanently extending the highest income tax rates in the country, California should be reforming the tax code to impose the lowest possible tax rate on the broadest possible tax base.
Tax reform would be enhanced by effective spending control. California’s state budget has grown around 70% under Gov. Newsom—far outpacing the growth in people’s incomes. A four-year spending freeze could moderate the harm from this higher fiscal burden.
Reining in regulatory policies and subsidies, especially environmental mandates, is also a must. Regulations should be predictable and impose the lowest possible compliance costs—precisely the opposite of the state’s current approach.
California has always been a national trendsetter. The state’s economic policy has been off track for many years now, and the impacts are beginning to show. Reversing these trends starts by changing the government’s view of the economy.
Wayne Winegarden is a senior fellow in business and economics and director of the Center for Medical Economics and Innovation at the Pacific Research Institute. You can reach Wayne at: wwinegarden@hotmail.com