How To Close The Budget Gap In Ten Steps

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By Peter Schrag
California Progress Report Columnist

Beginning today, the effects of California’s fiscal meltdown will become ever uglier, with hefty new cuts likely in education, health, welfare and almost every other state program. As always, the biggest victims will be children, the poor, the old, the sick and the future.

By the latest count the state faces a $21 billion budget gap in the coming 18 months and more deficits in the years thereafter. We’ll get some of the grim details from the governor’s state of the state and his budget proposals later this week.

But it doesn’t have to be this way – it’s not written in stone, and never was. We – the legislature, a generation of governors, the voters – have made the choices that got us here, and it wouldn’t be all that hard to work our way out of it, were we only willing.
Begin with a few simple facts:

*Because of the accretion of loopholes and other tax breaks enacted in the past three decades, California corporations are paying a much smaller share of their profits in corporate taxes now than they did in 1981. If the share had been the same in 2006 as it was in 1981, according to CBP, the California Budget Project, corporate tax collections would have been $8.4 billion higher. Our corporate tax rates are high, but the tax code is such a Swiss cheese of breaks that the official rates tell a misleading story.

*All, told, tax cuts enacted since 1993 cost the state an estimated $11 billion in 2008-9. 

*Because a much larger share of the state’s economic activity is now in services rather than in the production and sale of goods, sales taxes represent a much smaller share of personal income than they did forty years ago. “If taxable purchases accounted for the same share of personal income in 2007-08 as they did in 1966-67,” said a recent CBP report, “the state would have collected an additional $16.4 billion in sales tax revenues.”

*Contrary to myth, California is not a high tax state. Three years ago it ranked 17th among the states in the proportion of personal income that goes to state and local taxes, just slightly above the national average.

*In 2009, even as the state faced an enormous budget deficit, corporate interest groups got yet another set of tax breaks from the legislature -- $1 billion for Hollywood alone - that will cost the state $853 million in 2010-11 and rise to $2 billion-plus by 2013-14.

That story itself suggests some possible fixes, but there are many more. Most are not original with me. They come from the CBP, the Legislative Analyst and other sources.

(1)The governor himself has talked about repealing last year’s tax breaks. But there are plenty of others ripe for elimination: the business tax deduction worth some $340 million for job creation that’s simply a tax break for jobs that would have been created anyway; the enterprise zone program costing $100 million; plus elimination of the various accounting devices and the other holes in that Swiss cheese...

(2). Impose an oil severance tax similar to those in other states, which, at a reasonable rate, could yield over $1 billion more.

(3) Extend the sales tax to legal, accounting, auto repair, entertainment, gambling and other services, yielding, depending on the range of services covered, over $7 billion a year.

(4) Create a split property tax roll, retaining Proposition 13’s protection of residential property while assessing commercial property at current market value, which would raise an addition $3.3 billion and, equally important, create a much fairer business environment in which new enterprises no longer pay higher property taxes than their established competitors. It would also encourage the highest and best use of property. 

(5) Raise community college fees, as the Legislative Analyst (LAO) has long proposed, from the current $26 per unit – just under $800 for a full-year’s study -- to $60. California’s fees are far and away the lowest in the country. The new figure would still keep them well below the national average.

The LAO says there’d be little impact on students. Low income students are already exempt from fees. The increase would also make hundreds of thousands of students with higher incomes eligible for federal tax credits that according to the LAO, would fully reimburse those students for the fees they pay. At the current fees, the state effectively loses hundreds of millions in federal dollars that would pay for the courses that the system has been forced to eliminate.

Community college officials vehemently resist any increases, arguing that high sticker prices discourage students from enrolling. But with an intensive enough campaign informing students of the availability of financial aid and the federal tax breaks, that fear might well be mitigates. In any case, there can be nothing more deterring to a student’s attendance than finding that the courses he or she needs are overbooked or maybe not currently offered at all.

(6) Radically reform public employee pension plans, as the governor and others have long urged, to put all new employees into defined contribution plans, similar to IRAs and close enrollment in defined benefit plans which expose the state and local agencies to ever-increasing costs. End the costly and indefensible pattern whereby police officers, fire fighters and other public safety employees can retire at 50 or 55 with something approaching full pay.

(7) Cease funding water and road projects with general obligation bonds that must be repaid out of the general fund. Most such projects should be financed by user fees, especially for water user and developers and property owners in flood plains. All highway and bridge building should be funded by higher gas taxes which, in any case, should be raised for a long list of environmental and economic reasons.

(8) Restore a large measure of fiscal authority and accountability to local governments, including the power to raise taxes with a local majority vote.

(9) Require all programs or projects established by ballot measures, voter initiatives especially, to provide for sufficient funding to pay for the program. No more “free” stem cell bonds or after-school programs that are promoted as requiring no additional taxes. No three-strikes initiatives or other ballot-box criminal sentencing enhancements without provision of resources to pay for the huge costs associated with them. 

(10) And the perennial favorite of reformers: Restore accountability and political transparency by eliminating constraints on representative democracy, among them the supermajority requirements to enact budgets, the constitutional spending formulas such as Proposition 98, and legislative term limits.

That few of these things will pass or even draw strong political support in the near future is a measure of how far we have lost our sense of community and trust in our republican system of government, and of how much we fear the majorities of the future. Do we really want government to work, or do we want to be stuck in this rut forever?   
  
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Peter Schrag, whose exclusive weekly column appears every Monday in the California Progress Report, is the former editorial page editor and columnist of the Sacramento Bee. He is the author of Paradise Lost: California’s Experience, America’s Future and California: America’s High Stakes Experiment. His new book, Not Fit for Our Society: Nativism, Eugenics, Immigration will be published early in 2010.