California’s Propositions 1A-1E went down in flames yesterday. The largely symbolic Prop 1F passed by a wide margin, but none of the other five broke 40%. The voters have decisively rejected the legislature’s plan to fix the budget through tax increases and accounting gimmicks. Now, the state has four options:
- Start bouncing checks when the temporary tax increase expires next year.
- Raise taxes despite the voters’ objections. This would require a 2/3 majority in both houses of the legislature.
- Ask the federal government for a bailout. See Megan McArdle’s posts from yesterday and today for more about this idea. Heck, the way things are going, the federal government might need a bailout of its own in the coming decade or two.
- Fix the actual underlying problem.
As you may have guessed from how I worded the options, I favor Option 4. The California state government has plenty of revenue to provide a very good level of the basic core government services. California is a relatively rich state, and we have the dubious distinction of the highest sales tax in the nation and we’re not far from having the highest state income tax (not counting the Millionaire Surtax and the current “temporary” tax increase, Vermont beats us by a quarter of a percentage point). Thanks to Prop 13 (which caps the property tax rate and restricts increases on assessed property tax value), our property tax revenue per capita is below average, but not by much. Just about every other state in the union has less revenue per capita to work with than California, and most of them do just fine.
The problem is the spending commitments the state government has made. Every time the state has had a temporary revenue windfall in recent years (the dot com boom, the housing bubble, etc), the government has eagerly committed to new spending programs on the assumption that the increased revenue was permenant. This is not a partisan problem — California requires a 2/3 majority to pass a budget, necessitating bipartisan agreement despite the Democrats’ large majority in the legislature; and the excess spending has continued unabated through governors of both parties.
If the state had held the level of government services constant since 1999, raising spending at the rate needed to keep up with population growth and increase in the cost of living, California would have a slight budget surplus this year without the tax increase. If the state had started its spending discipline back in 1992, the budget surplus this year would be over $10 billion.
Rolling back decades of irresponsible spending increases won’t be easy. Every program, no matter how indefensible when first implemented, has people who rely on it. The process of fixing the budget will be hard and painful, but not so hard and painful as the alternatives of taxing the state into the ground or defaulting on the state’s creditors.
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California voters have been very consistent. They want high services and low taxes.
This is exactly the reason our founding fathers chose a representative democracy. You cannot run a government and produce a balanced budget using ballot measures. The legislature has to make compromises and balance taxes and spending. Unfortunately, California requires 2/3 approval in the legislature for the budget and for any tax increases. This requirement makes the legislature non-functional. Taxes cannot be increased, only decrease. The budget situation was so bad last year that the legislature did finally increase taxes. Note that the legislature had reduced taxes in previous years when funding was good, rather than save that money for bad years, and even last year, with the worst fiscal crisis in California history, the legislature reduced some corporate taxes while increasing sales and income taxes.
The 2/3 budget requirement makes the legislature non-functional. Perhaps that is what California residents want. They voted down several attempts to change it. As long as that 2/3 requirement is there, California budget will continue to be a complete mess.
mikeca:
LOL, I love you man. You present such a perfect view of the mind of the modern liberal.
Yeah, the problem here is that California voters are not giving their legislature ENOUGH POWER to TAX THEM!!!
Just let the California Legislature raise taxes on a simple majority vote and PROBLEM SOLVED! Wheeee!
So in total taxes, state and federal, California has one of the highest tax rates of any state. In fact taxes are so high that people are leaving California in droves.
And the problem, in mikeca’s world, is that the Legislature cant RAISE TAXES MORE!!!
I love it. You can’t make this stuff up.
Actually, I half-agree with mikeca. The 2/3 majority requirement to pass a budget is too high, and I think it’s a big part of why the legislature has been so irresponsible about spending. During good revenue years, everyone wants to expand their pet programs, and they can withhold their votes from the budget until they get their pork. To get a 2/3 majority, you need to agree to an awful lot of unreasonable demands. And then during bad revenue years, the budget is months late because you need 2/3 of the legislature to agree on what to cut. And most of the time, they can’t agree on what to cut and instead raise taxes or borrow money or engage in creative accounting to kick the problem down the road a year or two.
I’m with CC on the taxes issue, though. Raising taxes should be a last resort, especially in a state as heavily taxed as California. If you can’t get a 2/3 majority to agree to a tax increase, raising taxes probably isn’t appropriate.
Yeah, OK, I agree that the budget itself should not require a 2/3 majority. But that wasn’t the point mikeca hammered on.
Hope you like it in CA mike, pretty soon you’ll be one of the few left willing to pay the taxes…
The civil-service unions are a huge part of the problem, as were previous generations of politicians who provided a textbook study in public-choice theory, especially when it came to pensions and “down the road” expenses.
My solutions:
1. No more overtime for anything beyond very low level “line” employees. Managers don’t get overtime in the real world, so why should managers get OT in state government?
2. Pensions should not be collectible before minimum social security age, and should not be collectible while working as a state employee.
3. Pensions should be capped at about $75K/year. CA has over 5000 people collecting six-figure pensions, often starting before age 55.
4. Get rid of the “commissions” where termed-out politicians park themselves and collect fat fees for a few hours a month of work.
5. Abolish civil-service unions. They exist to drive up the cost of government, and to turn “public servants” into masters.
foobarista,
on what basis is it ethical to cap pensions?
Are you talking about stopping the practice of promising huge pensions, or are you proposing that we cancel already-vested pensions to current retirees and those who are about to retire? The former is probably a good idea, but the latter is unethical and possibly illegal as the pensions are part of the agreed compensation package for work they’ve already done for the state.
Eric:
And thus the suggestions to let CA go bankrupt.
If California is so hard up for money they could sell off some assets, for example, those off shore oil fields.
Conceptually, this ain’t too difficult.
I don’t mean to be flip, but I am reminded of the psychologist who tells his patient, the alcoholic, that the first thing he needs to do is……..stop drinking.
The first thing the Government of California needs to do is ……stop spending.
Of course, in both scenarios, it is HARD to implement such advice. It is painful. There is resistance. There is withdrawal. There needs to be sympathy. It may take time. Yet, nonetheless, the advice is sound.
–HB
p.s. How come too few people blame the California problems on the Democrats who have gerrymanderred the state and have run the Legistlature for nearly 40 years (notwithstanding the Terminator’s recent lackluster interegnum).
Hank: “How come too few people blame the California problems on the Democrats who have gerrymanderred the state and have run the Legistlature for nearly 40 years”?
Perhaps because too few people are Republicans
Frankly, I’d abolish defined-benefit pensions altogether for government workers. They are a massive public-choice hole in that politicians are far more responsive to unions than they’d ever be to the future generations who have to pay the pension – especially since they’ll almost always be underfunded if “big” pensions are promised. After all, many state and local elections have low turnouts, magnifying the power of the unions in these elections.
I’d replace with immediate matching cash in retirement accounts of the 401K variety, which would force all payroll expenses to be immediately visible and avoid kicking the can down the road.
Also, all-or-nothing pensions create a “lifer” mentality that is unhealthy – people should be moving between government jobs and other work as easily as they move between companies in the private sector.
Here’s an interesting article on how a senior official drove up his pension to nearly $300K/year – and retired at age 51.
As for the ethics, on what basis is it _not_ ethical to cap defined-benefit pensions at some fairly high level? If you want to have a bigger lifestyle in retirement, you can always save more money…
CC,
“Perhaps because too few people are Republicans”
You don’t need to be a Republican to blame the demise of California on Democrats. I’m not, and I do.
You simply need to be clear-thinking to place blame on the correct party (Note the small “p.”). Having an (R) next to your name isn’t necessary.
foobar,
sorry my comment was vague — i more or less agree with eric’s clarification. if an employee signed up with a defined benefits package, it is unethical to deny it to them later on. capping the pensions or providing alternative retirement plans like 401k deals is reasonable that’s what’s agreed upon at the outset.
zach,
Isn’t it unethical to allow past agreements to cripple present and future economic stability? Situations change. And agreement made when it was financially responsible to do so should be open to be revisited when keeping that promise threatens the existance on the promising body.
Ethics don’t enter into it. Especially when keeping “promises” fall upon the wallet of people outside of California.
I am not a citizen of California. Why should I have to pay for California’s inability to keep its promises to its citizens?
Isn’t that more unethical? And, in the final analysis, isn’t that the very definition of taxation without representation? My tax money (more than likely) is going to the State of California and I have no say in how the state gets to spend the money.
Sorry, the graver sin is Washington giving my money to a state I have no say in running.
Better they cut pensions then ask 49 states to bail them out.
This is why I really don’t like big government. If CA was a company (unless it was politically connected like Chrysler or GM) its fat pensions and generally awful management would make it go bankrupt quite quickly – at which point its unsustainable pensions would be torn up.
As a government, with a captive revenue stream, its politicians can basically do whatever sounds nice to the fluffy bunny crowd and local editorial writers (sorry for being redundant) and wins points with the unions, and tomorrow’s voters be damned.
When governments fail, they should go bankrupt and be reorganized, just like companies.
I voted NO on all the propositions.
But, hey, things can’t be too bad, economically.
Santa Clara County City council (San Jose area) just voted to jointly finance a new stadium for the San Francisco 49ers that would use city redevelopment money, tax hotel money and quote ” other funds” (from the local taxpayers ) to help subsidize a new 900 Million Dollars (US) football stadium.
Government is good. Everyone should love government.
It’s your friend when others are not your friend.
Even Guv. Arnold Schwarzenkennedy who supported all those lovable propositions was in Washington peddling the same economic malarkey has heard the voice of the CA voters.
He said, he heard the anger of the California voters.
Shouldn’t we all feel good about that ?
Ahnult is off Saving the Planet ™, so he can return to the happy world of Hollywood zillionaires who pay off Al Gore to live Carbon Neutral Lifestyles.
You can run a state with low level of services and low taxes, or you can run a state with high level of services and high taxes. As I tried to explain above, California voters have consistently voted for high services and low taxes, which is why you cannot fix the budget using propositions.
One of the major problems in California is its tax revenue stream is mostly based on income and sales taxes, which are very volatile. The so called “car tax” which was more stable was cut to almost nothing, and property tax rates are very, very low, especially on commercial property that has not changed hands in many years.
If you don’t like taxes in California, by all means get the heck out of the state. I understand house are cheap right now in Las Vegas.
mikeca,
You seem to equate low taxes with no money for public services and this simply isn’t the case. I live in Texas, a state with no income tax, and our services aren’t lacking.
In fact, for 2008, Texas was responsible for the majority of all job creation in the nation. This is a fact.
Low taxes means more businesses, and more businesses mean more jobs, and more jobs means more tax payers.
And more tax payers means more money for… wait for it…
PUBLIC SERVICES
So, I’m sorry, but your argument is partisan bunk.
“California voters have consistently voted for high services and low taxes…”
Do those “high services” include, if memory serves, $14 million for a study on sea otters? Or the $45 BILLION on a new train system? A train system no one will use because everyone in the state WANTS to drive! Did California suddenly think it was New York?
Billions upon billions are blown on the most absurd projects in your state and the citizens aren’t getting a thing for it.
Really, your argument is patently and proveably absurd.
mikeca,
You offer an honorable and vigorous argument from the left of center, but you fail to recognize one fact. Much of the govt spending in California is NOT for service to the general public, but to PAY the salaries and incomes and pensions of bureaucrats . The bureaucracy — like the Blob with Steve McQueen — is growing and growing and growing, while the private sector producers will start to leave the state.
I don’t say this as a right-winger, I’m pretty much a center left type of dude.
It’s a similar problem to the bussing movement by the left in the 70’s. It sounded like a good idea. I like integrated schools. But, in fact, people who don’t want their kids bussed will simply moved to the burbs or send them to private school.
–HB
MikeCA: CA voters have consistently voted against giant tax schemes whenever they were asked. But politicians and others have become pawns of the bureaucrat unions, and have driven up pay packages to the point where a vast number of retired CA workers have “won the lottery” with guaranteed lifetime pay of over $100K/year, which won’t end until their spouse dies. Lots of them will draw this pay for 1.5x the length of their actual time working. Sure, prison guards and firemen should be decently paid, but should they get retirement “bennies” that often are better than those we give the President?
Also, it’s hard to argue that these pay packages have any rationality other than “because our union can muscle it through”. Other than some sort of “working class heroism” argument, what possible rationale is there for paying these people so much? Their packages are frequently better than the compensation packages for four-star generals.
One aside: an unfortunate result of term limits was even more union power by weakening the state legislature, which is why I’m not a big fan of term limits as a cure to what ails us nationally.
And for the “love it or leave it” argument, I love my state and am not interested in leaving. I thought the “put up or leave” arguments were reserved for us evil right wingers
As a California resident myself, I do have to say that MikeCa is right about Californians wanting lots of government services. During the time I’ve lived here, most of the spending proposals and bond measures that appear on the ballot do pass. There were several ballot measures in 2004 and 2006 that attempted to restrain spending growth, and all of them were voted down.
This is not to say there’s not a ton of money that California spends which isn’t necessary to provide a high level of government services. I’m certain there’s a ton of waste in the budget; several good examples have come up in this thread. But Californian voters have had a major role in creating this mess, both by directly voting for more spending than our tax revenues will support, and by reelecting legislators and governors who can’t or won’t spend the state’s budget efficiently.
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