California Is Now the World’s Sixth-Largest Economy. Is It Because of Tax Hikes on the Rich?

California’s economy has recently surpassed France’s to become the sixth-largest in the world. The populous state grew 4.1 percent in the last year and had a gross state product of $2.46 trillion. The state also outpaced the rest of the U.S. in job growth.

Although there are numerous reasons for the Golden State’s economic growth, The Washington Post points to a 2012 increase in taxes on millionaires. The newspaper contrasts the economic development of California to that of Kansas, which reduced taxes on income and sales the same year.

The Post reports:

In 2012, voters in California approved a measure to raise taxes on millionaires, bringing their top state income tax rate to 13.3 percent, the highest in the nation. Conservative economists predicted calamity, or at least a big slowdown in growth. Also that year, the governor of Kansas signed a series of changes to the state’s tax code, including reducing income and sales tax rates. Conservative economists predicted a boom. …

California’s economy grew by 4.1 percent in 2015, according to new numbers from the Bureau of Economic Analysis, tying it with Oregon for the fastest state growth of the year. That was up from 3.1 percent growth for the Golden State in 2014, which was near the top of the national pack.

The Kansas economy, on the other hand, grew 0.2 percent in 2015. That’s down from 1.2 percent in 2014, and below neighboring states such as Nebraska (2.1 percent) and Missouri (1.2 percent). Kansas ended the year with two consecutive quarters of negative growth — a shrinking economy. By a common definition of the term, the state entered 2016 in recession.

Other effects of the Kansas tax cuts, which were meant to spur entrepreneurship, are well-documented. While state officials anticipated that the reductions would create a shortfall in the state budget, tax revenues have been consistently below even those expectations. Standard & Poor’s and Moody’s Investors Service have signaled that they could reduce Kansas’s credit rating, indicating there is a chance the state cannot pay its bills.

The shortfalls have forced Gov. Sam Brownback (R) and lawmakers to make additional adjustments. The state canceled the initial reduction in sales taxes, then increased them again, while delaying additional scheduled reductions in the income tax.

On the whole, Brownback’s policies modestly increased taxes for the poor and working class, who pay more in sales taxes than income taxes, while reducing taxes drastically for the rich. The poorest 20 percent of households — those making less than $23,000 a year — are paying about $200 more, on average, according to an analysis by the Institute on Taxation and Economic Policy in Washington. For the middle class, the changes have been a wash, with less-affluent households paying somewhat more and more-affluent households giving up a little less.

Meanwhile, the wealthiest 1 percent of households, those making at least $493,000 a year, are saving an average of $25,000.

Read more here.

— Posted by Donald Kaufman.