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.
It’s Not Just the California Budget
Over at Armed Liberal, I’ve got some comments up about the budget issues. Two points: California isn’t alone…go Google "state budget crisis 2003", in the first three pages, you’ll see references to California, Connecticut, Maryland,…
“Revenues don’t meet expenses, which means we have a fundamental fiscal discipline problem (we need to raise taxes or lower expenditures);”
“We keep trimming back on taxes, because it buys votes, and we keep hiring new state employees, because that’s what bureaucracies do.”
“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidate promising the most from the public treasury, with the results that a democracy always collapses over loose fiscal policy…” Attributed to Alexander Tytler, Lord Woodhouselee back near the end of the 18th Century.
And more “direct democracy” will lead to more “fundamental fiscal discipline” problems.
“Sales taxes are anathema to progressives, (but) (s)imply 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.”
Yup, keep voting for those circuses and bread, and pushing the costs off on the people who create the wealth.
Why can’t we just freaking mature and stop expanding government?
I think taxing via sales tax is a good idea. Let people see what government actually costs and it will get smaller. Or they’ll just vote to make sure they don’t notice how much it actually costs.
A.L.,
Not only are sales taxes regressive, they encourage people to purchase goods out of state, which reduces tax revenue both directly and indirectly (by moving jobs out of the state). Furthermore, unlike state income and property tax, it can’t be deducted from your federal income tax.
Property taxes are a better way to go, but would require significant restructuring of tax and budget law. Not only would you have to modify Prop 13, you’d have to do something about Prop 98, which says education (K-14) spending cannot drop below the percentage of the state budget it received the year before. This is an issue because property taxes are collected at the local level, not the state level. Thus, education grants to local governments, which represent a significant portion of the state’s general fund disbursements, could not be lowered, even if those local governments experienced a property tax windfall.
AL
Oddly, WA state, which has no income tax but a 9% sales tax and significant B&O (business property) taxes, is also facing a budget crunch. And the proposed solution is the “more stable” income tax!
Hmmmm…
What think you of this Paul Krugman column?
I think reducing the cost of government is the best way to balance a budget.
When the cost of Government is more than the traffic will Bear both the traffic and the Bears move on.
property taxes can be regressive too. not everyone owns property; and alot of people rent, but they still use public services. there needs to be a fairer balance of taxes across a broad base of items taxed, with wiser use of government by the citizens so it doesn’t grow out of hand.
the last time i had to visit an office in michigan’s state capitol, i literally stood at the counter waiting for more than 20 minutes while 3 women sat on their fannies (they were ‘on lunch’ or ‘on break’ and couldn’t be bothered), until the time arrived when they ‘could’ handle my request — which took all of 3 minutes and there were no other people there in line.
there are departments have nothing to do, departments which have something to do but they aren’t doing it and departments which have too much to do and not enough help.
a major issue in the increase in government — both state and federal — is the increase in the number of ‘departments’ with specialized services and those which ‘do’ things for people who can’t or don’t want to do them for themselves.
what frosts my cookies though, is how any of the state officials or politicians could even consider voting themselves raises in the face of our current economy. it’s blatant malpractice on their part. in point of fact, it would make better sense if some of them offered to take a decrease or pay cut — especially where a governor or other politican gets security provided, a home provided and has people who care for their needs.
our government needs to understand that it’s pockets (which are really OUR pockets) are not endless.
> the ever-diminishing pool of taxpayers is altering their behavior – even moving out of state, like Layne, to minimize the tax burden.
Jim Clark says that he moved out of CA for tax reasons. You might not know his name, but you’ve probably heard of three of the companies that he founded – SGI, Netscape, Healtheon. That’s three companies with billion plus IPOs.
I believe that if you do th math there is an increase in corporate axes comensurate with inflation, an increase in personal taxes over and above same and an increase in govenment spending on “new & improved” programs above both.
You comment “new employees” sounds like growth merely in existing bureaucracy. Of course it is a growth in the number of entitlements as well. As if we had a blank check.
I feel the Willie Browns of this state have milked the ‘progressive’ base for votes on the broad back of an unbelievable industrial base. It was allowed to because this dynamic base has fueled the economies of thenation and the world. Irresponsible spending has been obscured by this strength. Our businesses are and have been ‘expensed” out of the state for decades.
Your suggestions about how to increase revenue in politically palatable ways are not prudent. These coddle the Burtons of our state gov’t. If we have increased the the budget at x% over inflation for two years we should go back the the old levels until we can be stabilized.
Nothing itegral to the state of California was installed in the last three years. Let’s grow up and do it right.
The biggest problem in California is the voter referendum. Because of issues like Prop 98 (mentioned above) as well as Prop 13, the state budget is severely hampered. Take prop 98 for example….
WHAT IF, (and I know it’s a BIG what if), the population of California went into a severe decline and the population of students began to drop off? Under Prop 98, regardless of the population of the students, the budget for education could NOT be cut.
The problem here is that with voter referenda, the budget of California is put at the mercy of a populace which is not fit to make such decisions. Sound elitist? It is. It’s also why the founding fathers insisted on a Republic rather than a direct democracy.
California needs to change the consitution such that voter referenda need more signatures to get on the ballot. I don’t advocate getting rid of them, I merely advocate making the process of getting any single referendum on the ballot more difficult.
These changes would probably have avoided the disaster of Props 187 and 209 as well. I voted against both, because neither of them had been debated at all in the legislature. (To say nothing of the fact that Prop 187 was morally repugnant, and while I abhor Affirmative Action, Prop 209 also took funding away from girls high-school athletics, which was wrong). Laws as sweeping as these must be subject to very detailed scrutiny. The voter referendum intentionally sidesteps this debate.
In its time, it was a way of sidestepping a legislature which was in the control of the Railroad barons. Now, however, it is out of control.