California Supreme Court tax decision casts economic uncertainty over state

Taxes have consequences. So do California initiatives. Proposition 13 from 1978, which limited property taxes, laid the foundation for the state’s ensuing rapid growth: personal computers in the 1980s, the internet in the 1990s and 2000s, social media in the 2010s and now artificial intelligence in the 2020s. 

Voters resoundingly insisted: We will not let you tax us to infinity. And you must get our permission for local tax increases. But that victory for keeping your money has eroded over the years. To cite one example, the top income tax rate jumped from 9.3% two decades ago to 2024’s 14.4 percent, chasing more wealthy job creators to other states. 

Then last week a hammer was taken to taxpayers’ heads by the California Supreme Court. It essentially declared open season on wealth creators. It removed from the Nov. 5 ballot the Taxpayer Protection Act. The TPA would have required proposed state taxes to receive two-thirds votes in both the Legislature and from an initiative before the people; and two-thirds votes of the people for local taxes. So much for democracy.

In addition to keeping taxes in this high-tax state from rising even higher, it would have provided stability for businesses and families. Their planning future budgets would have been more predictable. 

Instead, no one can know how high taxes will go. 

How will businesses react? Government functionaries, including the lawyers sitting on the court, seem to have little idea how businesses look at things. Here’s how: There’s always a bottom line. If expenses exceed income for too long, then the company goes broke.

That’s why companies need certainty in the tax code. Prop. 13 gave them that certainty on property taxes. The TPA would have done so for all state and local taxes. 

For example, if a business knows taxes will rise 5%, it can plan for that. It might be able to absorb the increase by passing on costs to consumers, or cutting pay and benefits to employees. Or it might cut unprofitable product lines.

But what if a business can’t know if taxes will rise 0%, 5%, 10%, 15%? Then it can’t plan.

Adam Smith wrote in 1776 in “The Wealth of Nations”: “The tax which each individual is bound to pay, ought to be certain and not arbitrary.” He even said “a very considerable degree of inequality…from the experience of all nations, is not near so great an evil as a very small degree of uncertainty.”

The Supreme Court’s rejection of the TPA means worse is to come. Future state and even local tax-limitation measures begin with the uncertainty they might be canceled by the courts before voters get a say. Yet there is no such limit to state and local governments loading ballots with new tax and bond measures.

It’s already bad and getting worse for businesses. Jonathan Lansner reported in these pages June 20: “California lost 222 big employers in 4 years, No. 3 drop in the US.”

The New York Post reported June 8: “Blaze Pizza joins other businesses leaving California for ‘growth’ elsewhere.”

I could list a dozen similar stories.

David Huerta, president of SEIU California and SEIU United Service Workers West, gloated after the court canceled the “Taxpayer Deception Act,” as he branded it. He called the TPA “a flagrant attempt by a few extremely wealthy real estate developers to undermine our entire democratic system and our voice as voters and devastate the vital services Californians rely on — all to avoid paying their fair share.”

How naïve. Businesses don’t pay state and local taxes when they leave California to avoid the uncertainty pushed by the union bosses and their kept legislators. And if the “wealthy real estate developers” got a tax break, they would pass some of it along as lower prices for housing. And healthy profits would encourage them to build more apartments and condos, alleviating the housing shortage. It’s called the free market.

Instead, the uncertainty increases for everybody. Even governments can’t plan because they don’t know how many tax-paying businesses will leave. How absurd.

John Seiler is on the SCNG Editorial Board and blogs at: johnseiler.substack.com