Black Markets

"High-Tax and High-Regulation" California Targets Underground Economy With New Bureaucracy

|

I'm heading for Phoenix, folks.

California's self-inflicted economic woes are nicely summarized in the state Senate's passage of a bill targeting underground economic activity, and a Board of Equalization press release trumpeting the same. In explaining the need for SB 1185, BOE Vice Chair Michelle Steel describes her own Bulgaria on the Pacific as "a high-tax and high-regulation state" in which "it becomes attractive to operate businesses outside the law in order to obtain a competitive advantage." Is the solution to reduce taxes and ease regulation? Of course not! Instead, the legislation establishes a new bureacracy with its own staff to which people can snitch about off-the-books businesses, and which will also pool data compiled by other agencies.

As described in the June 1, 2012 Board of Equalization press release (PDF):

The BOE is partnering with Senator Curren D. Price, Jr. (D-Los Angeles) to promote legislation (Senate Bill 1185), which would create a Centralized Intelligence Partnership (CIP) – a central location for the BOE, the Franchise Tax Board, and the Employment Development Department to share information that will help them expose, investigate and prosecute illegal operators as well as create a statewide evasion hotline for the public to anonymously report illegal activities. SB 1185 continues to accelerate towards becoming law, heading next to the Assembly.

Steel's full rationale is:

"The underground economy takes a heavy toll on California businesses and state revenue," said Vice Chair Michelle Steel. "In a high-tax and high-regulation state such as California, it becomes attractive to operate businesses outside the law in order to obtain a competitive advantage over law-abiding citizens. We must work together to ensure that no California business is put at a competitive disadvantage for simply following the law."

With regard to Steel's comments above, it may be worth noting that Chief Executive magazine has ranked California dead last in terms of business environment for eight consecutive years. "Once the most attractive business environment, the Golden State appears to slip deeper into the ninth circle of business hell. … Each year, the evidence that businesses are leaving California or avoid locating there because of the high cost of doing business due to excessive state taxes and stringent regulations, grows."

The Tax Foundation puts California at 48 out of 50.

The Pacific Research Institute's 2008 Economic Freedom Index put California at 47 out of 50 (PDF).

Forbes doesn't quite agree, giving the state's regulatory climate a merely awful 40 out of 50.

Maybe there's a clue in there. As I've pointed out before, Friedrich Schneider, one of the world's foremost experts on "shadow" economic activity — business conducted out of the sight of government that would be perfectly legal if forms were filed and taxes paid — says, "tax and social security contribution burdens are one of the main causes for the existence of the shadow economy," and "every available measure of regulation is significantly correlated with the share of the unofficial economy."

If you want people people to work in the open, you can't tax them and regulate them so heavily that they'd rather hide. That's not so hard to understand, is it?

But California opted for a new intelligence bureaucracy, instead. Wait … Let me modify that to an expensive new intelligence bureaucracy, instead. An analysis of the bill released May 29 by the California Senate Rules Committee (I'd link to it, but the new legislative Web site doesn't seem to generate permanent links) included in its "Fiscal Effect" section staffing and facility costs adding up to around $2.5 million annually, plus "[s]ignificant cost pressures to hire additional administrative, investigative, and enforcement staff among the participating entities upon full implementation of the Partnership." This is supposed to be offset by "[u]nknown future revenue gains, likely tens of millions of dollars annually beginning in 2014-15."

In fact, the BOE bold-facedly trumpets that the legislation "is expected to generate $38 for every dollar invested by its third operating year."

Really? Has any bureacracy ever generated such a return? And this one seems to be nothing more than a glorified snitch line and filing cabinet for tax data.

California: a state that acknowledges its problems, and picks exactly the wrong solutions. Head for the exits, folks.