• This is a partial transcript from "The Journal Editorial Report," June 10, 2006, that has been edited for clarity.

    PAUL GIGOT, HOST, JOURNAL EDITORIAL REPORT: A much-hyped democratic political wave failed to form Tuesday, as the GOP managed to hang on to a seat vacated by former Congressman Randy "Duke" Cunningham in California's special election — this as Democratic primary voters chose state treasurer Phil Angelides as the party's candidate to challenge Governor Arnold Schwarzenegger this November.

    Here with insight on the politics and economics of America's largest state is economist Arthur Laffer. He joins us from San Diego.

    Art, welcome to the program.

    ARTHUR LAFFER, ECONOMIST: Thank you very much, Paul. It's a pleasure to be with you.

    GIGOT: I've known you for years as an optimist on California. But lately you have been pretty downbeat on the political and economic trends in the state. Does the outcome of Tuesday's election make you feel any more optimistic?

    LAFFER: Oh, sure it does, yes. We were very fortunate to be able to defeat Proposition 82, which would have raised the income tax in California by 1.7 percentage points. And that was huge.

    GIGOT: That's the Rob Reiner proposition.

    LAFFER: The Rob Reiner proposition, and it went down in flames. You know, you still got to put it in balance. Forty percent of the people still thought it was appropriate to absolutely exploit people who have high incomes. So even though we defeated it, and it's wonderful, there still is a residual problem out there.

    Angelides winning was a problem. I thought Steve Westly had a very nice proposal as a democratic candidate for governor. He lost. But Brian Bilbray — I mean that's the seat that you're talking about — won and won fairly handily. I think that's a wonderful thing as well.

    GIGOT: Well, Phil Angelides, the treasurer, has said explicitly — in fact, he started his campaign with a pledge to raise taxes. Does this mean that we're going to have, in November, a big battle over taxes between Arnold Schwarzenegger and the Democratic candidate?

    LAFFER: I imagine we will. But I don't think anyone will be taking the position, Paul, that we should be cutting taxes. I mean I really hope that the governor does take that position. But I don't expect it.

    I think Angelides will want raise them. And the governor will oppose raising taxes, which will be fine, because I think the governor will beat Angelides.

    But still, I would love to see someone aggressively take the position of reforming the tax codes in California and actually cutting taxes here.

    GIGOT: Well, California has a top marginal rate of about, I think it's 10.3 percentage points. That is on the highest earners. And that is one of the highest rates across the country. I think you have to live in New York City to actually pay a higher rate. Is that...

    LAFFER: It’s incredible, isn't it? It's just amazing.

    GIGOT: Is that the single — in your view, is that the single biggest economic problem in California?

    LAFFER: Well that's one of the single biggest ones. I think the governor's — you know, when the governor came out with the state of the state address in January, I was disappointed. I mean seriously, he swung and took the position of being pro the unions of fire fighters, the teachers, the nurses.

    Now, we all love them individually. But as collective organizations, they really are anti-growth, anti-California.

    And then the governor went for a large infrastructure spending as well. And then to top it off, he went for an increase in the minimum wage, which as you know, Paul, is really detrimental to the poor, the minorities, the disenfranchised, whenever the economy slows down. That's what the killer is.