The news out of Sacramento is both sobering and predictable. Like clockwork, a budget crisis has emerged some 18 months after the state’s economy significantly slowed down. The reasons are quite simple. California’s revenues show pronounced year-to-year fluctuations, but most state spending is on autopilot, set to make a steep upward climb. The result is that in years when the state capitol realizes a revenue windfall, the legislature can avoid making any hard choices. In years where the windfall is not realized, draconian cuts have to be imposed.
Part of the blame lies with the state’s very progressive income tax system and the fact that income taxes account for the biggest share of state revenues. The Governor pointed to this problem in last week’s State of the State address. He noted that “The rich in California, by far, pay most of the income taxes. But we only have so many rich people. The top 10% of our population -- those making more than $119,000 a year -- pay nearly 80% of the taxes”. Indeed, during one windfall year for the state, it was estimated that the capital gains taxes paid by just a dozen entrepreneurs who founded a hot Silicon Valley startup accounted for over one third of the growth in state revenues.
Another way to think about this is to consider the variation from AVERAGE growth that has occurred in state revenues. According to information from the state’s Independent Legislative Analyst’s Office, since 1994 revenues to the state’s general fund grew, on average, 6.6%. However, over that period of time revenues have shown great variation, in one year growing as much as 22% and in another falling 4.8%.
Now that story about state revenues is becoming generally known. However, judging from the comments in blogs and editorials in local newspapers, what is not as well understood is how the commitments that the state makes on the spending side of the ledger create obligations that are very difficult, if not impossible, to painlessly cut back. Consider corrections. As voters have demanded longer sentences for criminals, spending for the California Prison System and the Youth Correctional Authority has grown from $2.7 billion in 1990 to more than $10 billion in 2008 with an average annual growth rate of 8.3%. The problem is that when a convicted felon stands before a judge, the sentence is for a determinate period of time, not “up to 10 years if Sacramento realizes a windfall large enough to keep you in prison.”
Analogous problems exist in the areas of education and heath and human services. When voters passed Proposition 98, they committed the state to spend a certain percentage of revenues for K-14 education and to set last year’s spending as a “floor” for the next subsequent budget. On the social service side of the equation, slowing state revenues do not suddenly make elderly, poor and disabled citizens young, affluent, and able-bodied. Moreover, there isn’t some bureaucracy to cut back (unless in these areas) because corrections, K-16 education, and health and human services consume just over 90% of the state’s budget. “Fixing the budget” means real policy choices. Should the state increase class sizes? Should it rethink sentencing guidelines for non-violent offenders? Should it offer health care benefits that exceed federal Medicare standards? While surely cuts can be made to make Sacramento more efficient, closing the $14 billion dollar gap will require more fundamental conversations about what our state’s citizens consider the legitimate role of government.
The good news is that while the short term budget battle promises to be bloody, long-term solutions are beginning to emerge. Many, including the Governor, have called for both a strengthened state spending cap and a rainy day lock box. Most versions of this reform call for limiting the yearly growth in state spending to the growth in the state’s population and the rate of inflation. When revenue exceeds the cap, as it would do in the windfall years, they would be placed into a rainy day lock box that would be drawn down only in years when state revenues failed to grow.
These two reforms are good starts but, in addition, the state must address a revenue system that creates booms and busts. Without revenue “smoothing,” it is likely that the reserve fund will grow to a gargantuan size during the boom years and become too tempting a target for either new spending commitments or tax refunds. Such an outcome would render the cap and lock box paper tigers and leave us back with the unacceptable fiscal situation we find ourselves in.
Consequently, in addition to the cap and reserve ideas, Sacramento leaders need to reform the state’s tax system to smooth out year-to-year revenue swings. Neither the right nor the left is likely to embrace those changes. The most sensible policy approach would be to cut the marginal income tax rates on wealthy Californians and enact other kinds of taxes (property, excises, inheritance) that fall generally on the same economic class but which would bring in a more consistent level of revenues. In concert with the tough spending cap and lock boxed rainy day reserve, such revenue smoothing would create a much more stable fiscal situation in Sacramento. The Golden State deserves nothing less.
Users may post more than one comment, but should not pose as multiple users. Multiple posts from the same IP address but with a different user name on each will be reviewed to determine whether abuse has occurred.
Posts with personal attacks or unsubstantiated allegations may be edited or deleted.
If you have not posted before, you will be required to verify your email address before your post is displayed.
Your blog is interesting!
Keep up the good work!