During the months-long budget showdown before the general election, Democrats in the Assembly and Senate proposed to solve California’s budget shortfall by enacting around $10 billion in new taxes, namely, through a rise in the top marginal tax rates. Governor Schwarzenegger, for his part, advocated a “temporary” one-cent sales tax increase (along with some spending cuts). Neither proposal succeeded. The Legislature’s minority Republicans, whose support is necessary to pass a budget, demanded spending cuts and opposed any tax increases. Unfortunately, the “compromise” budget relied on outright borrowing and clever accounting.
However, this sort of patchwork planning was not sustainable in the long or short run. California’s ailing economy, with 8.4 percent unemployment and one of the biggest housing slumps in the nation, has created a growing cash shortfall for the state government. The current fiscal year still features a $15 billion gap between outlays and revenues. The gap is expected to widen to $25 billion in the coming fiscal year. To make matters worse, the state coffers face the prospect of depletion in the next several months. As a result of all this, the Legislature and the governor have been called back to the negotiating table to correct the budget.
The fault lines in Sacramento are similar to those in the previous rounds of negotiations. The Democrats have again emphasized the need for revenue increases. Tax hikes are still a non-starter with Republicans. The governor finds himself somewhere in the middle, which makes him unpopular with both parties. Nevertheless, there is a substantial chance, as of press time, that Schwarzenegger will cut a deal with the Democrats that involves raising taxes via a simple legislative majority. The constitutionality of such a measure is dubious, and the GOP has already promised to dispute it in court.
But however the horse trading turns out, Californians need to reassess the path of taxes and spending going forward. The state’s budget problems are chronic, if not pathological, and only comprehensive, long-term solutions will adequately address the underlying issues.
To wit, California’s government spends too much. In 2004, the state spent $104 billion. By 2008 this figure had risen to $145 billion, notwithstanding the fact that those years were relatively prosperous and the need for government largesse was consequently smaller. Despite the massive increase in outlays, few Californians would argue that their government is substantially better than it was five years ago.
That’s because a lot of taxpayers’ money is going to waste. Compensation of public employees is one area in which cuts could reasonably be made. Perhaps the most notorious example of over-compensated government employees is the state’s prison guards. The guards have a base salary of up to $74,000, a level 39 percent higher than that prevailing in comparable states and the federal government. Not satisfied with this windfall, the guards’ union has been attempting to strong-arm the governor into another raise.
But what matters is not just the amount of spending but the way in which money is spent. For example, the US Census data show that California’s educational system spends $8,486 and receives $10,264 per pupil. This leaves plenty of states with less education money than California, but this does not necessarily handicap performance. Utah spends just $5,437 per student but manages to outscore California on tests. Meanwhile, Washington DC spends $13,446 per pupil and has the nation’s worst fourth-grade reading scores. The government should be looking to get more bang for their buck rather than throwing money at problems.
California taxpayers are already heavily burdened. According to the non-profit Tax Foundation, the state has the sixth-highest state/local tax burden in America, the fourth-worst business tax climate, the highest top marginal income tax rate (10.3 percent), the tenth-highest corporate income tax rate, above-average sales taxes and the highest gas tax rate. Forbes ranks California the worst state for business costs and the 11th-worst state for business overall. The Small Business & Entrepreneurship Council considers California the “second-toughest state in the nation for small business.” People with ambition and human capital can and do flee the state. 1.32 million native-born Americans have left California over the last ten years. These people are disproportionately those with the experience and capital needed for innovation and job creation.
To resolve its chronic deficits and promote long-term growth, California must restrain spending and avoid increasing taxes. Among other things California needs a hard cap on spending, a meaningful “rainy day” fund, and revision of some voter initiatives that tie the government’s hands. Otherwise, the Golden State could travel down the road to stagnation, becoming a Gilded State that must perpetually resort to sham budgets.
Blair Nathan, a Senior Staff Writer, was recently the Republican candidate for California’s 11th Senate District, which includes parts of Santa Clara, San Mateo, and Santa Cruz Counties.