Dems Prepping State For Tax Hikes

DEC. 22, 2010

By STEVEN GREENHUT

As the year ends, let’s review where Californians stand with its busted budget. This piece was published in PublicSectorInc.

California’s Democratic leaders would have you believe that our state’s budget has been cut to the bone. They contend that the state’s never-ending budget deficit—currently estimated at more than $28 billion over 18 months—is the inevitable result of an unusually bad economy, and that more revenue is needed to avoid devastating service cuts. This is a false choice—there remains fat to cut in California’s budget, if politicians are willing to overcome union objections to doing so.

Governor-elect Jerry Brown (D) held a budget briefing earlier this month and fiscal conservatives took heart that the new governor was dealing forthrightly with dismal budget realities.

However, there’s no mistaking that Brown and his Democratic colleagues featured at the briefing (Senate President Pro Tem Darrell Steinberg, Assembly Speaker John Perez, Controller John Chiang and Treasurer Bill Lockyer) view higher taxes as the prime solution to California’s problem. Perez, a former union organizer, said as much at the meeting. Steinberg, a close union ally, repeatedly voiced his concern about the effect of budget cuts on the state’s public employees.

The briefing was designed to show that California can no longer afford the sort of one-time budget-balancing gimmicks tried in the past. That much is true. There are no more revenues to shuffle around redevelopment agencies, no more federal revenues that will backfill gaping holes in the budget, no more opportunities to accelerate the collection of personal income and corporate taxes. In fact, Brown’s presentation noted that 75 percent to 85 percent of the predicted savings from short-term budget solutions over the last three years did not materialize.

But while the Democrats are right to say that we have run out of accounting gimmicks, they are wrong to draw the conclusion that we must therefore raise taxes. For instance, Perez noted that the general fund budget has already decreased dramatically—evidence, in his view, that little more spending can be cut.

But the sharp drop in revenues and expenditures is mostly reflective of California’s extremely volatile tax system, which is so dependent on high earners and capital gains. For example, general fund spending rose 15 percent from FY05 to FY06, and then 11 percent into FY07. California went on a spending binge when the economy was strong, creating room for spending cuts when revenues are weak. (This is also, of course, a strong argument for tax reform that will make revenues more stable.)

Brown’s presentation also included charts that are supposed to show that the state government is stretched too thin. One showed that California ranked fourth-lowest in the ratio of state employees per 10,000 residents. Another chart showed that the state’s pupil-staff ratios in its public schools are among the highest in the nation. The goal was to say that there is no more room to cut. But Brown failed to note that California is at the top in compensation for teachers, prison guards and other public employees—meaning that where there is not room to cut headcount, there is significant room to cut compensation per employee.

Brown did not specifically call for tax increases, although he has made reference to allowing the voters to make that decision on their own. No doubt, the same public sector unions that spent $30 million in independent expenditures electing him governor will spend money convincing voters that tax increases are the only options available should tax measures go to the 2011 ballot, as expected.

Republicans, despite their increasing irrelevancy in California at the statewide level, have been holding firm against tax increases. But they inadvertently buy into the false choice between services or taxes as they repeatedly argue for more cuts. They need to move back to the brief period earlier this decade when Republicans talked seriously about reform.

When Arnold Schwarzenegger came into office he promised to blow up the boxes of government, but his government reform commission was quickly put on the shelf. Brown is coming into office promising cuts in his staff, but that’s more symbolism. State leaders need to question the major ways that the state spends money and confront the unions that are the prime obstacle to financial efficiencies and real reform.

“The governor needs to add a third (or perhaps fourth) voter option to his false ‘either-or’ choice,” explains Richard Rider, chairman of the San Diego Tax Fighters association. “It’s not just less services or more taxes—the issue he’s dodging is how best to deliver desired public services.”

They should listen to Sacramento Bee columnist Dan Walters, who wrote, “We should, for instance, find out why, with 12 percent of the nation’s population, we have 32 percent of its welfare cases, and why we’re spending three times as much on prisons as Texas, which has almost as many inmates.”

And Californians should ask why there are more than 15,000 members (and growing) of the $100,000 pension club (in all California retirement systems), and why lists of state salaries are filled with police and fire officials and city managers earning $250,000 or more.

We are asked to choose between fewer services or higher taxes. Yet no one wants to look at the inefficiencies in the current system, at the way the state misspends its resources. Where’s the talk of privatization? Or pension reform? Or reduction of public sector salaries?

How about discussions about outsourcing and competitive bidding? Or as CalWatchdog reporter Wayne Lusvardi noted in a recent article, about the amount of money Californians spend on pork-laden water bonds or a stem cell research agency that has done little more than enrich a small cadre of former politicians?

Or how about the amount we spend on AB32, a global-warming law that imposes massive costs on the state government as well as private businesses? The state, Lusvardi argues, spends billions of dollars a year on “luxury” goods, yet is now talking about cutting services to the poor.

The state spends 40 percent of its budget, by constitutional mandate (Prop. 98), on its K-14 public schools, yet how can anyone look at the state’s school districts—especially massive ones such as Los Angeles Unified—and not conclude that so much of the funds are misspent?

No one wants to discuss the revenue side, either, where a punitive tax and regulatory climate makes businesses unwilling to expand in the state, and therefore depresses revenues the state might otherwise receive.

This isn’t about targeting waste and abuse (a worthy effort, but one that never achieves much savings) but about taking a serious look at reforming government, something that would not only save billions of dollars but would improve these services as well. But such reforms will involve putting the public interest over union interests—a tough task in Sacramento.

Even Los Angeles Mayor Antonio Villaraigosa, a liberal Democrat and longtime ally of the labor unions, earlier this month said at a think tank conference on education, “At every step of the way, when Los Angeles was coming together to effect real change in our public schools, UTLA [United Teachers Los Angeles] was there to fight against the change and slow the pace of reform.” He called the union “one unwavering roadblock to reform.” The same could be said about every public sector union in California—and those unions are the most powerful interest group backing Democratic leadership in Sacramento.

The state’s Democrats can pass a budget without Republican support, thanks to the passage of Proposition 25 on Nov. 2, which allows budgets to be passed with a simple majority rather than with a two-thirds supermajority–so long as the budget does not raise taxes. This “reform” has long been sought-after not only by the majority party, but by the state’s moderate business community, which believes that the supermajority rule causes gridlock.

We’ll soon see the result. The buzz around Sacramento is that Brown is trying to build the case that tax hikes are a necessary part of any budget fix. He and his fellow Democrats will pass a no-new-taxes budget filled with crippling cuts to public services. Once that’s passed, the prediction goes, he will roll out a series of tax-increase initiatives for voters to approve and thereby avert the worst of his spending cuts.

I’m all for cutting the state government at every level. But the current scenario threatens to cut in the wrong way. For instance, instead of cutting absurd pay and benefit packages for public employees first, or wasteful pork-laden boondoggles such as high-speed rail, the state is looking at cutting programs that help the poor.

It’s a sophisticated game of chicken. The Contra Costa Times quoted a prominent liberal writer who echoed widely shared views in the Capitol: “I think the signals are clear that he’ll push through an austerity budget with an all-cuts budget early in the year, and he’ll say if you don’t like it, here are the revenues we need,” according to Robert Cruickshank, editor of Calitics.com.

So while the new Brown administration is at least confronting the fiscal problems the state is facing, it is not being forthright about the choices that are available, and it is preparing to foist a false choice on California’s electorate. As Rider noted, there’s a third way to look at the matter—focusing on the way the state spends its resources, not simply on whether revenues are sufficient to pay for the current level of spending.