In case you’ve been napping, California is broke. California isn’t alone…go Google “state budget crisis 2003″, in the first three pages, you’ll see references to California, Connecticut, Maryland, Massachusetts, Michigan, New York, Pennsylvania, and Virginia.
Now I’m no budget or tax analyst, but a few things ought to be obvious.
If everyone’s having the same problem, that doesn’t mean it’s not a problem – but it does mean that you have to look to systemic, rather than specific factors to understand what’s going on.
Before you get all up in my face about “Well if it’s a systemic problem, why are you for recalling Davis? It wasn’t his fault!” let me point out that what I expect from elected officials at a level above the minor-city-scandal-level is some form of behavior better than that shown by John Belushi in his tender, romantic scene with Carrie Fischer in the Blues Brothers:
Jake Blues: No, I didn’t. Honest. I ran out of gas! I had a flat tire! I didn’t have enough money for cab fare! My tux didn’t come back from the cleaners! An old friend came in from out of town! Someone stole my car! There was an earthquake! A terrible flood! Locusts! IT WASN’T MY FAULT, I SWEAR TO GOD!”
…which is pretty much what we’re seeing right now. A decent Governor would have stood up last year – before the election – and told the truth. Davis didn’t.
I can’t testify to the other states, but what’s been going on in California is simple: We’ve been running deficits in the $10B range for about two years, since the dot-com implosion. We assumed that our straightened state was a temporary one, and that the revenues would come back Real Soon.
They didn’t. They aren’t going to, anytime soon.
And meanwhile, we have two bothersome tendencies: We keep trimming back on taxes, because it buys votes, and we keep hiring new state employees, because that’s what bureaucracies do.
We’ve faked our way through this like a bankrupt Web designer clutching a LOTTO ticket, sure that salvation was coming next Saturday. And we’ve borrowed against the credit cards…and worse, we’ve borrowed against the kid’s cards as well.
I’m not talking literally about the future inhabitants of our great states, I’m talking about the dependent governments below the state level – the counties, townships, and cities.
What’s gone on is a massive transfer of obligations from the feds to the states – so the Federal budget looks better, because the high-cost, high growth programs are suddenly state programs. And the states, dancing for their fiscal lives, are transferring programs downstream to the counties and cities in a series of budget “realignments“.
Now, three things are clear: Revenues don’t meet expenses, which means we have a fundamental fiscal discipline problem (we need to raise taxes or lower expenditures); we’ve faked it over the last several years with a series of creative financial mechanisms which essentially involve hypothecating assets (vide. the Tobacco Settlement) or future income in order to cover current shortfalls, with the notion in mind that things have to get better – or at least the current legislators won’t be on the hook any longer.
In the case of California, one of the issues has been the over reliance on income tax revenues from the highest-income Californians. This is a good thing in the sense that they can afford to pay more taxes (after all, their income has overall grown a whole lot faster than the income of the lowest 20%); it’s a bad thing in that the income is somewhat volatile, and worse because the ever-diminishing pool of taxpayers is altering their behavior – even moving out of state, like Layne, to minimize the tax burden.
I’m thinking about a budget and tax strategy (I don’t know enough detail, except in a very few areas, to actually propose tactics), and I’ll propose two basic goals:
1. Budget Integration. We need to look at State, county, and city budgets in some integrated way, to deal with the – transfers – between the levels which tend to mask spending and growth in a number of areas.
2) Tax stability. California is mandated to carry a balanced budget. We need to relook at our tax programs to attempt to get a more stable revenue stream for the state. This implies that we shift from personal income to corporate income, sales, and property taxes. This is pretty obviously nontrivial is so many ways…but I’ll suggest one point in each of these three areas that could make a difference.
From the California Budget Project:
Over the past two decades, the burden of funding state services has shifted from corporate to personal income taxpayers. The personal income tax is forecast to provide 48.9 percent of state General Fund revenues in 2003-04, up from 34.8 percent in 1980-81. Corporate tax receipts are expected to provide 9.2 percent of General Fund revenues in 2003-04, down from 14.4 percent in 1980-81. New, increased, and expanded corporate tax breaks are responsible for the decline in the share of state revenues provided by the corporate income tax. Tax reductions enacted between 1998 and 2002 alone will reduce 2002-03 revenues by $4.6 billion.
We hammer corporations with regulations and worker’s comp costs, but they save on Prop 13 property taxes (business property changes hands less often then personal property, and so is reassessed less often) and corporate income taxes. We need to look at the level of corporate income taxes, and more importantly specific corporate income tax expenditures (targeted tax breaks) very carefully and consider eliminating the breaks and raising our overall level of tax collections.
Sales taxes are anathema to progressives, because they are inherently regressive…lower-income household have to spend most of their income to survive, and so wind up paying a far higher percentage of their income in sales taxes. But they are stable, and more importantly, they are the means whereby those who earn in the cash economy contribute their share. Simply put, we ought to bump the state sales tax by a fairly significant amount, and rebate it back to lower- and middle-income taxpayers, possibly by covering some portion of their payroll taxes with it. Note that some burden will fall on lower- and middle- income taxpayers; that can’t be avoided, although it can be meliorated. Further note that those who live in the cash economy – who include illegal immigrants – will be disproportionately affected. Good; they need to pay their share, too.
On Prop 13, one major loophole is the ability of commercial property holders to keep properties in partnerships and corporate ownership, and to restructure or sell the corporation or partnership, thereby selling the property without triggering reappraisal. I believe that Prop 13 is untouchable in the near and intermediate future, but this is a shopping-center sized loophole that needs to be closed.