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Monday, July 21, 2014

Johnston: California Job Growth Defies Predictions After Tax Increases

Sacramento Bee op-ed:  State’s Job Growth Defies Predictions After Tax Increases, by David Cay Johnston (Syracuse):

WelcomeDire predictions about jobs being destroyed spread across California in 2012 as voters debated whether to enact the sales and, for those near the top of the income ladder, stiff income tax increases in Proposition 30. Million-dollar-plus earners face a 3 percentage-point increase on each additional dollar.

So what happened after voters approved the tax increases, which took effect at the start of 2013?

Last year California added 410,418 jobs, an increase of 2.8 percent over 2012, significantly better than the 1.8 percent national increase in jobs. California is home to 12 percent of Americans, but last year it accounted for 17.5 percent of new jobs, Bureau of Labor Statistics data shows. ...

These results may surprise those who have heard that tax increases are job killers. Taxes can do that – if what is being taxed directly applies to job creation. For example, a 10 percent increase in payroll taxes (Social Security, Medicare and state disability) would probably hamper job growth, said David Neumark, chancellor’s professor of economics and director of the Center for Economics & Public Policy at the University of California, Irvine.

Neumark said he asks his students, “Does raising income tax rates reduce hiring?” “The answer is no. What firms care about when deciding how many workers to hire is the marginal product of workers and the marginal cost of those workers. So if you are an employer and your personal income tax rate is increased, that does not raise the marginal cost of your workers, but it may encourage you to work a little less hard,” Neumark noted, applying standard economic theory.

Some research into tax rates indicates that high rates have the opposite effect: People may work harder, trying to make more money to achieve a desired after-tax income and may slough off if tax rates are lowered. This is known to be the case for people who have a savings target for money to leave their children and are subject to estate taxes – they save more to leave the after-tax sum they prefer, but save less when the tax is lowered or no longer applies to them.

The empirical evidence also shows that the best-paying jobs tend to be clustered in states (and countries) with high taxes. The same tends to be true of wealth creators, including the most money-motivated among scientists, and existing wealth holders not actively engaged in business. ...

Neumark noted that there is one group of million-dollar-plus income Californians who could easily leave – retirees. “If you have a California business, it’s pretty hard to leave or to move the business, and costly, too,” Neumark said. ...

Daniel Wilson, a Federal Reserve Bank economist in San Francisco, has been studying the job migration patterns of so-called star scientists, especially those who hold many patents. His preliminary data show a tendency for such star scientists to move to Washington state, which has no income tax, but not to Texas, which also does not tax incomes. That seems to indicate a preference among such high performers for public amenities and, perhaps, the climate and outdoor options of the West Coast.

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It's almost like Republican taxation dogma is self-serving nonsense.

Posted by: Morse Code for J | Jul 21, 2014 5:43:16 AM

This isn't news if you've been paying attention. Economic disaster did not follow Reagan’s massive 1984 tax increase (though Republicans did not predict economic disaster at the time–after all it was Reagan’s tax increase). The Republican predictions of economic disaster and massive job destruction failed to materialize after Clinton’s 1993 tax increase. Conversely, economic nirvana did not follow Bush 43's tax cuts. Neither a balanced budget nor job growth has resulted from Kansas Gov. Brownback’s large tax cuts. Wisconsin lags behind all other Midwestern states in job creation. So should we have expected job destruction from California’s recent tax increases? Maryland’s recent tax increases have not killed economic growth or job creation. Only a conservative would fail to detect the pattern here.

Posted by: Publius Novus | Jul 21, 2014 7:37:17 AM

Meanwhile, jobs growth in tax-cutting Kansas moved at a slower pace. But why do people keep trying to establish a connection between employment and tax rates? Why not a connection between employment and banana consumption? It's like explaining the economic success of other sunshine states that have no income tax. Texas and Florida have great weather, just like California. Their state government per-capita spending is far lower than most states, including Kansas, which is not much different from California. Then compare life expectancy to per-capita spending. California ranks 4th. Florida and Texas are not in the top 20.

Posted by: Bob Kamman | Jul 21, 2014 8:25:15 AM

Public Novius, the points you make are sound on a technical level. The problem is that this has not been reported at all or not widely or only in ways that convey meaning. It is clear from comments at many other websites today other sites that many people in California -- where I grew up, lived for 36 years and reported for two of its best newspapers for 17 years -- did not know these facts. And notes from some journalists to me make it clear they did not either. Why? Because the raw data had not been analyzed and imbued with meaning. The editors at the Sacramento Bee, an excellent newspaper for more than a century, thought this was news worthy enough to make it the cover of their Sunday Forum (opinion) section.

Posted by: David Cay Johnston | Jul 21, 2014 9:27:22 AM

Mr. Johnston: You and I are saying the same thing--it's not news if you've been paying attention. Unfortunately, as you point out, most folks don't pay attention.

Posted by: Publius Novus | Jul 22, 2014 6:34:34 AM

Job growth doesn't mean anything without understanding where the growth is. The majority of growth is still in the area of $15 an hour which is a joke for anyone living in this state. Moreover, there is no breakdown of part-time versus full time growth and we still are not back to 2007 levels. Even if we reach those levels, with the decline in high paying jobs in the defense industry and other higher paying industries (I realize Silicon Valley is an exception), will the true income of workers equal that of 2007 levels, taking into account the true cost of inflation as opposed to the numbers furnished us by the government? Although there are a number of reasons why taxes in 2012 in totality were much greater than 2013 (a number of people recognized capital gains at lower rates), there was still a shortfall of $1.5 billion with respect to personal income taxes as of 4/15/2014 as compared to the same period ending on 4/15/2013. And what I find comical is that job growth for the most part is anemic, so regardless of where California fits in with respect to other states, what does it really mean at the end of the day? Corporate tax revenue was up substantially, but there are a number of corporations that are in the process of relocating over the next couple of years and who knows at the end of the day how that will play out?

Posted by: David Rice | Jul 22, 2014 10:59:15 AM