Taxpayer Protection Act of 2010 could spur economic recovery in California

Creative destruction, as any economist knows, is a healthy feature of a capitalist economy, especially when it comes to the eradication of failed ideas. However, as any economist also knows, in order for the destruction involved to be truly “creative,” not only must old paradigms fall by the wayside, but new ones must invariably take their place, and there must be a healthy environment for those paradigms to exist, otherwise they will whither and die.

To that end, faced with the destructive nature of California’s budget crisis, one rare positive byproduct of California’s faith in direct democracy has been its ability to generate new proposed paradigms under which the crisis could be solved.  Not all of those paradigms will lead to success.  Fortunately, though, there does appear to be at least one proposition in circulation which, while it is only new insofar as it extends a tried and true element of California’s past fiscal successes into new realms, would likely spur the economy toward new commanding heights.

That circulating proposition is Proposition 1447 which, according to the California Secretary of State, “Imposes Additional Requirements for Legislature to Approve Certain State Fees and Taxes and for Voter to Approve Certain Local Taxes and Fees. “ In other words, unlike the demonstrably problematic California Democracy Act, which outright repeals the need for a two-thirds majority in matters of taxation, Proposition 1447 (nicknamed the “Taxpayer Protection Act of 2010”) would extend it even further, thus outright negating one of the legislature’s favorite tactics in making up for budget shortfall. That is, the catch-all panacea of tax increases would be almost completely removed from the picture.

Naturally, there are elements of this idea which should cause any sober observer some measure of concern, and it is indeed true that the Taxpayer Protection Act is only one-half (or speaking optimistically, two-thirds) of a viable solution for California’s budget/economic travails. The most obvious argument against implementing the bill would be that California simply cannot afford to have fiscal gray areas which are taxation-related, subjected to the stringent two-thirds vote requirement in a time of fiscal crisis. This objection would doubtlessly dovetail with a claim that, whatever California may do with its taxes, its spending is still set in stone by bills like Proposition 98. Under this logic, the Taxpayer Protection Act is at best an unnecessary roadblock to emergency measures and at worst, a structural requirement that deficits be in force, without meaningful spending reform.

There are a few notes which should be raised in response to these objections. First, a quick perusal of the text of the bill itself shows that some areas of contention still remain wherein majority vote would be applicable. For instance, Section 3, subsection e reads, “For purposes of this section, the term “fee” does not include a fee or charge to reimburse the state for the cost incurred by the state in providing a product or service requested by the payer which the payer reasonably could have declined.” The usage of the term “reasonably” leaves this idea of a “genuine” fee as opposed to a hidden fee sufficiently legally vague that, if necessary, many emergency measures (such as increases in vehicle licensing fees) might still be permissible under the act.

However, this cosmetic note obscures the larger philosophical gulf between opponents and proponents of the act. For instance, one tacit assumption of the bill seems to be the common argument on the part of tax-relief proponents that cutting taxes can increase revenues due to the economic growth promoted by lower taxation. This Laffer curve-inspired argument could arguably be complicated by mandatory spending measures, but considering that the only really meaningful one of these (Proposition 98) imposes a percentage requirement on spending, rather than a lump sum, tax relief would still have the generalized result. Moreover, proponents would probably agree that, as a previous Governor of California argued in a 1980 Presidential debate, “government doesn’t tax to get the money it needs, government always needs the money it gets.” By this logic, tax relief would be a means of starving the bloated government and forcing it to cut back on unnecessary spending.

Opponents, by contrast, likely either reject the notion that spending should be cut further, or believe that such a move should precede tax relief. In the case of the former predisposition, one can only respond that California has no choice but to cut spending, if it wants to see economic growth sometime in the future.  In the case of the latter, matters are more complicated. Perhaps the best response which can be devised, however, is that the only way by which spending cuts can be politically effected is by cutting the allowance of the spending State.

In any case, the Taxpayer Protection Act of 2010 ought to be recognized as a valuable contribution to California’s fiscal debate, and also as a potential piece of a viable, economic recovery package.