California's Budget Crises, Tax Reform, and Domestic and International Tax Competition
Posted: 18 Mar 2012
Date Written: January 9, 2012
How do (and how should) governments design fiscal policies to compete in a globalized economy while meeting internal policy priorities including redistribution? In 2009, Governor Arnold Schwarzenegger repeatedly declared fiscal emergencies as California's state budget deficit reached all-time highs. The Governor and legislative leaders established the Commission on the Twenty-first Century Economy to recommend tax reforms that would improve the state's fiscal health and competitiveness. But when the Commission issued its recommendations, many of which were consistent with domestic and international trends in taxation, legislative leaders were highly critical and the prospects for reform dimmed. The case describes the political and economic contributors to California's persistent fiscal deficits and the reforms recommended by the Commission. It summarizes recent trends in taxation by U.S. states and OECD nations, relating the empirical trends to tax theory. Finally, it engages the issue of inter-jurisdictional tax competition from both positive and normative perspectives.
Learning Objective: Familiarity with the forces driving tax policy, including tax competition across jurisdictions. Ability to debate tradeoffs of pursuing a competitive tax policy, such as sacrificing internal policy priorities.
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