Economists Call Prop 30 A ‘Double-Edged Sword’

By City News Service

The passage of Proposition 30, which is aimed primarily at funding education, is hailed by some analysts as heralding the end of California’s budget woes, but the tax measure is actually a “double-edged sword” that may not provide long-term solutions, according to a UCLA economic
forecast released Wednesday.

The proposition, which boosts the sales tax by a quarter-cent and raises taxes on higher-income residents, represents an investment in education but fails to address long-term funding, “and it holds out the specter of making things worse rather than better,” wrote UCLA Anderson School senior economist Jerry Nickelsburg.

Nickelsburg noted that a recent report by the state Legislative Analysts Office concluded that Proposition 30, combined with a continuing economic recovery and budget cuts, have led to the “possible end of a decade of acute state budget challenges.”

But Nickelsburg said that while Proposition 30 provides some “breathing room,” it is not a sure-fire cure, and increased taxes always lead to some “disincentive effects.”

“For example, higher income taxes may reduce the demand for living in California as individuals follow incentives to other locales,” he wrote. “If that were the case, then the appreciation rate of housing would decline and part of the increase in taxes would be borne by homeowners in a decrease in the value of their assets. This will impact property tax revenue as well.”

The long-term impacts of the sales tax hike are difficult to predict, Nickelsburg wrote, noting that previous tax rate changes have had mixed results. Overall, however, he said passage of the measure will not dramatically change earlier predictions about the state’s economy over the next two years.

Proposition 30 could “decrease uncertainty and increase optimism about California as an investment locale,” he wrote.

“We take the optimistic view here. Consequently, we have marginally lowered the forecast for 2013 from our September outlook, but kept 2014 as a year in which California growth will once again exceed the U.S.”

On the national front, UCLA economists predicted that Congress and President Barack Obama would reach a compromise to avoid the so-called “fiscal cliff,” brought on by the pending end of previously enacted tax cuts combined with automatic spending cuts.

Although the shape of a compromise remains unclear for now, the U.S. economy is still expected to see modest growth in the near-term — with gross domestic product increasing 0.7 percent in the current quarter and at less than 2 percent during the first half of 2013, according to economists.

Looking into 2014, “we can visualize growth accelerating to a run rate in excess of 3 percent,” UCLA senior economist David Shulman wrote in his section of the forecast.

“In this environment the unemployment rate will remain close to 8 percent in 2013, but decline to 7.2 percent by the end of 2014,” he wrote.

“Although this reduction in unemployment appears modest, we are forecasting job growth on the order of 160,000 a month in 2013 and 200,000 a month in 2014.

Not great, but a small improvement from recent years.”

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December 6, 2012  Copyright © 2012 Eastern Group Publications, Inc.

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