California Wants To Make Itself Even Less Competitive

Economists sometimes talk about a fictional $1 million tax on, say, beagles to illustrate the perverse effects of a poorly designed tax code. In theory, the tax could bring in $20 billion, given there are about 20,000 registered members of the breed. But in reality, the tax would yield little, because few people would claim to own such dogs, suddenly "discovering" that their beagles were really something else, maybe mixed breeds or schmeagles.

That idea is useful when discussing what's benignly referred to as the "estate tax." Critics refer to it by the ominous-sounding "death tax," given that it imposes a 40 percent hit on accumulated wealth after its owner heads to that great estate in the sky. It's really the "Tax on Your Dead Neighbor's Family," given it's all about grabbing others' inheritance.

In the United States, the tax is imposed on estates valued at $5.5 million or more, which sounds like a lot of money until one starts thinking about the value of businesses. A nice house in Newport Beach can be worth millions of dollars, and the value of land in a bustling Central Valley nut farm can be worth many times that amount.

It can be tough enough to keep a business going after the owner dies without giving Uncle Sam a big share of the operation. Just because a business operation has great value doesn't mean that it is operating on huge margins. It's therefore common for longtime family-owned businesses to be put to auction after the founder's death.

Supporters argue that few estates pay very much for reasons that go back to our tariff on beagles. Wealthy folks spend an enormous amount of money on accountants and tax lawyers to shield their assets from the tax man. But obviously, some people cough up the money, or else officials wouldn't be so eager to maintain the tax.

Liberals love the tax for ideological reasons. They are egalitarian, so they bristle at inherited wealth. "Our nation cannot survive morally or economically when so few have so much while so many have so little," said Democratic presidential candidate Sen. Bernie Sanders (Vt.), expressing the view of the class-warrior left. He and Hillary Clinton had both proposed dramatically increasing tax rates on people's estates.

But conservatives find the tax particularly unproductive and unfair. It's unproductive to be forced to spend so much time and money sheltering assets. And it's unfair to tax something multiple times. It also quashes business development, since killing businesses has a perverse effect on working-class jobs.

Fortunately, the Trump administration understands the problem. "No family will have to pay the death tax," Trump said on the campaign trail. "It's just plain wrong and most people agree with that. We will repeal it." It's an area where the new president has spoken with unusual clarity, and Republican members of Congress are moving bills that would do just that.

California's Legislature, however, remains a hotbed of progressivism. Sen. Scott Wiener, a San Francisco Democrat who ironically has a reputation as being pro-business, has introduced Senate Bill 726. If approved by the legislature and then voters, it would impose a California estate tax that's identical to the federal one, but only if the federal tax is repealed. His goal, according to a statement, is "recapturing the lost funds and investing them here at home in our schools, our health-care system, and our roads and public-transportation systems."

It's the latest example of Trump-spite in the state Capitol, but it sends a clear message that California isn't in any danger of becoming a business-friendly state any time soon.

And I chuckle at the idea of "investing" in the state's governmental operations. Pick any government agency or project and the waste is rampant. Infrastructure is crumbling, yet it's not from a lack of dollars, given that taxpayers spend far more on most things per-capita than other states. There is never any serious discussion about improving the delivery of services.

The estate tax is particularly pernicious in that it harshly penalizes those Californians who have been the most successful and entrepreneurial and rewards those who are bureaucratic. Sanders is right that this is a moral issue, although his concept of morality is completely backward.

Ironically, states with the most progressive tax systems not only have boom-and-bust cycles that wreak havoc on budgets, but they also have some of the worst inequality. California is dependent on capital-gains revenues, yet we have the highest poverty rates in the nation. If you punish success, you get less of it. That means fewer jobs and fewer entrepreneurs, as they head to states that welcome their efforts.

The beagle tax is too crazy, even for California's Legislature. But the estate-tax idea would be even more destructive to our competitiveness with other states. Maybe legislators should spend less time figuring out ways to spite the new president, and more time figuring out how to make this wonderful place more hospitable to growth.