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CAPITOL JOURNAL

Poizner sticks to the supply side

GOP candidate thinks a state tax cut will solve money problems.

November 02, 2009|GEORGE SKELTON

FROM SACRAMENTO — Reduce taxes to increase tax revenue? That seems illogical on its face. But Steve Poizner is banking on it to balance the state's books if he's elected governor.

Or maybe he's just banking on the tax cut promise to win Republican votes in next June's gubernatorial primary.

Regardless, the state insurance commissioner has firmly staked out the lower-tax position and appears to believe in it with religious fervor.

It's not my intention to denounce or preach any economic faith -- to render judgment in the long-running argument between so-called supply-siders and the Keynesian school. That's beyond my scope, although I do admit to being a supply-side skeptic.

This is about analyzing the main plank of Poizner's pitch to become governor.

The Silicon Valley Republican, who made a fortune by creating a tracking device for cellphones, is running third behind former EBay chief executive Meg Whitman and former Rep. Tom Campbell.

"If you have lower tax rates then you will attract more taxpayers," Poizner says. "The core of my economic plan is to bring more taxpayers back to California. . . . I'm absolutely convinced that lowering tax rates will produce an increase in tax revenues."

That's an old supply-side argument normally heard from the ideological right. There are many critics on the left.

Poizner's "economic prescriptions for healing the state's fiscal maladies are like a quack doctor who 'bleeds' his patient by attaching leeches," wrote Cal State Sacramento history professor Joseph Palermo in a liberal blog, the California Progress Report.

Poizner calls it his "10-10-10 Plan." He'd cut taxes 10%, pare spending 10% and wind up with a $10-billion "rainy-day fund." Specifically:

* He'd reduce income, corporation and state (not local) sales tax rates 10%. He'd also cut in half the tax rate on capital gains; now they're taxed the same as ordinary income.

Not only would this prompt departed taxpayers to return to California, Poizner predicts, it would dissuade taxpayers from leaving. He insists the tax cuts wouldn't really cost the treasury anything. His plan "should generate substantial revenue shortly after enactment and only grow from there," a campaign statement contends.

* Over two years, he'd pare overall state spending by nearly $10 billion -- amounting to 10% of the general fund -- even though it already has been whacked $30 billion below projections during the current and last fiscal years.

The savings would come from substantial cuts in welfare eligibility, requiring managed care for all Medi-Cal recipients, reducing prisoner healthcare costs and, of course, rooting out the elusive bureaucratic "waste" that every gubernatorial candidate rails about but seldom seems to find.

* Those tax and spending cuts would provide enough money to create a $10-billion rainy-day reserve by the end of his first term, Poizner maintains.

It all smacks of the same concept that the first George Bush branded "voodoo economics" when Ronald Reagan campaigned on it for the Republican presidential nomination in 1980.

The next year, President Reagan did substantially reduce income tax rates. Poizner, echoing other supply-siders, contends the Reagan tax cut proved that reducing rates does increase revenue. But others argue that the evidence is flimsy at best.

"As a matter of fact, it did not increase revenue," says Reagan biographer Lou Cannon.

"It's impossible to find out what the tax cut did. I've never found anyone who could show a definitive relationship between the tax cut and the recession that followed, or the boom that followed the recession. . . .

"There's absolutely no evidence I've ever been able to find that you get this nirvana of revenue growth" from reducing taxes.

Cannon notes that Reagan raised taxes several times after he initially cut them.

I asked Gov. Arnold Schwarzenegger's budget director, Mike Genest, a fiscal conservative.

"Tax cuts do tend to improve the economy," Genest says, "but it's very hard historically to find where they result in a revenue increase. You could argue that the best thing for the economy is to have no taxes at all, but people depend on some government services. Without them, we don't have any economy. If you don't believe me, look at Somalia."

Genest continues: "There's no basis to believe that a tax cut now would be affordable given the budget situation the state faces. I know Rush Limbaugh is going to hate me."

As for deeper spending cuts, Genest says: "You can always cut spending by 10%. The question is do you want to. We just tried to close parks, and that didn't work out. We tried to take money away from women's shelters and had to relent on that. . . ."

There's also a dispute about whether businesses and wealthy Californians really are fleeing the state to escape high taxation. Many think any fleeing has more to do with high property costs, traffic congestion and subpar public schools.

"If high income taxes were chasing away rich Californians, high-income households would be more likely than low-income households to move to states without income taxes, but they aren't," the Public Policy Institute of California reported in July. And two years ago, the institute found that "when California businesses relocate, most stay within -- rather than moving out of -- the state."

Poizner dismisses such talk. "They're just wrong," he says, citing "anecdotal evidence."

And, he adds, his campaign staff studied other states that had cut taxes and found the result was increased revenue.

High taxes aren't the only culprit driving away jobs, Poizner continues. "The regulatory system is a Byzantine web." He'd like a 24-hour, one-stop shop for entrepreneurs seeking most business permits.

Some of this may be fantasy. Voodoo. And some may make perfect sense. Whatever, it's the kind of stuff the candidates should be debating. Poizner's trying to.

--

george.skelton@latimes.com

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