California Tax Increases Have Consequences

May Revise 2017This is the 30th California state budget I’ve written about after I drove out here in 1987 to write editorials for the Orange County Register. Looking over the years, my theme has been the same: The state’s taxpayers can only bear so high a burden of taxing and spending. When that burden gets too large, the economy as a whole suffers, the tax base erodes – and massive deficits ensue.

So it’s not surprising that in Gov. Jerry Brown’s May Revise to his budget for fiscal year 2017-18, which begins on July 1, revenue expectations are dampened. That is despite the national Trump Boom for the economy which in April produced a surprise $182 billion surplus in federal revenues, instead of the deficit economists expected.

As Brown pointed out in his press conference revenues are up by $2.5 billion from his January budget proposal – but $3.3 billion less than what he projected a year ago. Of that extra $2.5 billion, about $1.1 billion will go to schools (following the Proposition 98 formula that around 40% of new income must go to schools). The rest will go to restore some funding, such as to child care, that had been cut in January.

The general fund total will be $124 billion. By contrast, that first budget I wrote about three decades ago was just $33 billion. And the state was better run.

Brown cautioned of the economic recovery, “Moreover, by the time the budget is enacted in June, the economy will have finished its eighth year of expansion – just two years short of the longest recovery since World War II.”

“Make no doubt about it,” he said, “cuts are coming in the next few years, and they’re going to be big. It would be imprudent not to prepare for it.” He also fingered potential cuts in Obamacare and other federal spending, depending on what is done by President Trump and Congress.

Strangely, he also ridiculed Trump’s tax-cut plan to boost the sluggish economic growth of recent years by cutting the top income tax rate to 35% from the current 39.6%. There would be two other tax brackets, 10% and 25%. The corporate tax rate would be cut to 15% from 35%. And the mind-bogglingly complex Alternative Minimum Tax would be axed.

Although not a “flat” tax plan, which would levy one rate for all types of income, the Trump plan would be flatter than the current system, and much simpler.

“The idea we’ll have a massive tax cut and spend $1 trillion on infrastructure doesn’t make sense,” Brown said. “You need real money to do real things.” Actually, Trump’s infrastructure plan reportedly “is expected to be more about regulatory reform and alternative financing than a federal spending spree.”

And in his own 1992 run for president, Brown crafted an even bolder tax-cut plan, a flat tax of just 13% for everything, calling it “a silver bullet solution for the economy. With one stroke, the major source of venality and graft will be eliminated and the Byzantine strictures of the Internal Revenue Code made so simple that even a sixth-grader will understand them.”

His 1992 plan was designed by famed economist Arthur Laffer, who helped design the 1978 Proposition 13 tax cuts in California that undergird state growth since then, Ronald Reagan’s 1981 tax cuts that boomed the 1980s economy – and Trump’s new plan.

Indeed, the current national economic boom is an anticipation of the Trump tax cuts – albeit the final numbers aren’t yet in place.

So, why is California lagging the federal boom? The reason is simple: California keeps heaping higher costs – taxes and regulations – on its citizens and businesses, discouraging the higher production that broadens the tax base. Consider just the tax increases since November:

  • The Proposition 55 extension of the Proposition 30 “temporary” income tax increase. Even Brown conceded in his press conference, “We already are taxing at 13.3%. Nevada is 0%. So you have to be careful.” Apparently there’s still some of the 1992 Jerry Brown around who knows taxes can get too high.
  • The Proposition 56 tobacco tax increase of $2 a pack, which especially will hit poor people; the wealthy now seldom smoke.
  • The Proposition 67 plastic bag tax of $300 million a year.
  • The gas tax of $5.2 billion a year. Brown said it just restores the equivalent purchasing power of the gas tax as it existed under the Deukmejian administration in the 1980s. The proportion had been eroded by inflation. But what about the money going to “mass transit”? How do we know the gas tax won’t be siphoned off to the general fund during a recession, as have past gas-tax increases? And how about an equivalent cut in other taxes to balance the new slam on taxpayers?

State Controller Betty Yee’s revenue estimates a day earlier, on May 10, were close to Brown’s. “April personal income tax (PIT) receipts of $12.76 billion lagged by $707.6 million, or 5.3%,” she estimated. But the big blow came from sales taxes, “April retail sales and use tax receipts of $696.7 million fell short of projections in the governor’s proposed 2017-18 budget by $106.7 million, or 13.3%.  For the fiscal year to date, sales tax receipts of $18.99 billion are $453.5 million below the revised estimates released in January.”

More study will be needed. But I think what’s happening is Californians are reacting to the massive new tax increases listed above – and are anticipating getting hit with yet more new tax increases from the revenue-deluded Legislature, with its 2/3 supermajority. So they’re spending 13.3% less.

Although I’m not a smoker – except for a stogie every four months – friends of mine are. A pack a day means $2 less a day, or $730 less a year – after income taxes. That means they have to cut down in other areas of spending, and are. Less spending means less sales tax revenue. Just for that tax.

Said state Sen. John Moorlach, D-Costa Mesa, of the May Revise, “California’s unrestricted net deficit, according to the state’s Comprehensive Annual Financial Report, remains at $169 billion. That’s $4,374 per person. This marks almost no improvement from the previous year.”

On the positive side, the governor adopted Moorlach’s proposal to prepay CalPERS by $6 billion. As the May Revise document explained, “The additional $6 billion pension payment will be funded through a loan from the Surplus Money Investment Fund. Although the loan will incur interest (approximately $1 billion over the life of the loan), actuarial calculations indicate that the additional pension payment will yield net savings of $11 billion over the next 20 years.”

And the Rainy Day fund will increase to $8.5 billion, or 66% of the funding mandated by Proposition 2.

In other areas, in the journalists’ conference call later with Budget Director Michael Cohen, I asked how much the governor was willing to contract out for engineers for the new infrastructure projects. A report by the Legislative Analyst’s Office found 3,500 featherbedding jobs at Caltrans.

Cohen said there would be such contracts with private firms, but only in the short term. Because these are long-term spending projects, Caltrans will do the construction. “We scheduled 240 positions to be downsized, but now will keep them for the time being,” he said.

On the University of California and California State University spending controversies, Cohen said, “At UC, we hold $50 million from them until they implement” reforms in the recent auditor’s report that criticized them, and in an agreement with the governor. And on the recent UC tuition increase, he said more money will be given to Cal Grants.

Brown himself, in his earlier press conference announcing his budget, had attacked “university salaries that are way too high, particularly for their administrators.” But essentially, nothing is going to change in systems where, for UC, the high-paid administrators have doubled their numbers the past two decades and now outnumber professors. It’s like an army with more generals than privates.

If Republicans want to have some fun, they should take up my recommendation to put on the ballot an initiative that a) cuts tuition and b) pays for it by cutting the number of UC and USC administrators in half.

In sum, as Jerry Brown’s penultimate budget, the May Revise pushes the state’s out-of-whack finances into the future of whatever governor succeeds him. Although Brown has been more frugal than spendthrift predecessors Gray Davis and Arnold Schwarzenegger, who left office with massive deficits hanging over the heads of Californians, he has not solved the state’s endemic fiscal problems, but once again has kicked the can down the road.

He likely was the last governor with the experience, savvy and clout to advance both needed pension reform and comprehensive state tax reform, such Laffer’s proposed flat tax of about 6.5% for California. Instead, Brown can say with Louis XIV, “Après moi le deluge.”

In his press conference on the budget, Brown derided Lafferesque supply-side tax cuts as “voodoo economics” and “what Bob Dole called the plan of a ‘riverboat gambler.’” But what does the history show? The “voodoo economics” crack came from George H.W. Bush against Reagan’s economic plan during the 1980 campaign. The voters picked Reagan over Bush in the 1980 GOP primaries, then Bush became vice president. Reagan cut taxes. The economy boomed.

Bush became president in 1988 because he solemly pledged, “Read my lips! No new taxes!” But as soon as he got a chance, he repudiated both his pledge and Reagan’s “voodoo economics” tax cuts by increasing taxes in 1990. The economy tanked; the deficits got worse, not better. Bill Clinton was elected in 1993 on a pledge of a “middle class tax cut.”

In 1993, Bill Clinton broke his pledge and increased taxes, which Democrats now still wrongly maintain was behind the 1990s economic growth. But as Paul Harvey would say, here’s the rest of the story. After Clinton lost both houses to Congress to Republicans in 1994, he flipped. In 1995 he cooperated with Republican House Speaker Newt Gingrich on massive capital gains tax cuts that boosted the economy – and derided Dole as “the tax collector of the welfare state.”

In Clinton’s ’96 campaign, he ran a great ad touting his tax cuts while deriding Dole’s $900 billion in tax increases. Voters re-elected Clinton. Then Clinton and Gingrich passed more tax cuts, which boosted the economy so much the federal deficit ran a surplus for a couple of years, the only time that has happened the past 50 years.

It’s too bad, but except for Silicon Valley billionaires, Californians are going to miss the Trump Boom.

John Seiler is a former Editorial Writer at the Orange County Register

This piece was originally published by Fox and Hounds Daily

What CA Taxpayers Need to Know About Gov. Brown’s New Budget

BudgetAverage taxpayers in California are probably aware that the state budget was in the news again over the weekend. But even folks who follow both presidential politics and local issues probably couldn’t be blamed if they tune out stories about the California budget. It’s not that they don’t care. It’s just that public finance issues can be horribly confusing and difficult to follow.

In terms of timing, the process itself is easy to grasp. The annual budget year runs from July 1st to June 30th of the following year. That’s why people refer to a single budget using two years. For example, the budget currently being discussed is the 2016-2017 budget. The Constitution requires that the governor present a budget in January and that the Legislature enact the budget by June 15th. Because state bean counters and analysts don’t have a full grasp of the economy or revenue projections in January, the governor’s budget goes through an update, or “revision,” in May. It was this May “revise” that the governor presented on Friday that has been in the latest news cycle.

But perhaps the most confusing aspect of the state budget is the fact that many of the numbers that are bandied about are inconsistent. Thus, an average citizen might hear on the radio that the state budget is $122 billion dollars. And yet, when they get home, they read that spending is actually $173 billion. At this point they are more apt to turn on the Giants v. Dodgers game rather than make sense of the huge disparity.

The inconsistency in these budget numbers usually is attributable to the fact that there is a big difference between “general fund” spending and total state spending which includes “special funds.” General fund revenue comes from the state income tax, sales tax, corporate tax and a handful of other sources. “Special funds” come from the gas tax and fees from regulatory programs like cap and trade funds. For average taxpayers, the worst example of “special fund” revenue consists of the illegal CalFire “fee” which slams property owners with hundreds of dollars of additional property taxes. The legality of the CalFire fee is currently being challenged in court.

When it comes to the state budget, citizen taxpayers are justified in being both confused and angry. Not a day goes by without some scandal surfacing about those who spend our tax dollars. Whether it is the Bay Bridge, which exceeded the original cost estimate by a factor of six, or California’s feckless policies that have driven up state debt so high that, were the state a private company, it would be immediately eligible for bankruptcy.

As should be expected, California has the largest state budget in the United States. But what should not be expected or tolerated is the hostility of our political leaders toward those of us who pay the bills. California has the highest income tax rate in America as well as the highest state sales tax. Our fuel costs are also the highest due to both the current gas tax and environment regulations. The result of these policies has been an accelerated exodus from the state by both businesses and individuals. It should be painfully obvious even to the Governor and left-leaning legislators that you can’t have a vibrant state budget unless you have a vibrant economy.

Finally, Gov. Brown, while not officially endorsing a proposal to retain California’s sky-high income tax rates, implicitly endorsed it by noting that the state would be in a deficit situation if the measure didn’t pass in California. But this deficit projection is only attributable to higher state costs due to the foolish policies of elected leaders, not state revenues which are actually increasing faster than population and inflation.

The real cure for California’s budget woes is a combination of policies that would make California competitive in the global economy, not higher taxes and more burdensome regulations.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

CA budget: Gov. Brown to shrink spending plan

As reported by the San Jose Mercury News:

SACRAMENTO — Repeating calls for fiscal restraint and seeking to lower expectations about how much more the state can afford, Gov. Jerry Brown on Friday released an updated $122.2 billion state budget that’s slightly smaller than the blueprint he pitched in January.

Tax collections outpaced the governor’s conservative estimates and forced him to increase the size of the general fund spending plan each of the last few years. This time, the $454 million revision came as Brown acknowledged that revenue growth had stalled.

The governor blamed the slump on an unexpected dip in the notoriously volatile capital-gains taxes collected by the state on the sale of stocks and bonds and said managing the state budget is “like riding a tiger.”

“The surging tide of revenue has begun to turn,” Brown said. “Quoting Aesop’s fable of the ant and the grasshopper: ‘It is best to prepare for the days of necessity.’ “

Blockbuster deals Brown struck with the …

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Gov. Brown Walks the Budget Tightrope

jerry-brownGov. Jerry Brown has unveiled the highly-anticipated revision to his annual state budget, teeing up final spending negotiations in Sacramento — largely with his fellow Democrats.

Despite a resurgence in California’s fiscal fortunes, including tax receipts some $2 billion in excess of estimates, “analysts are warning that California could be headed for more fiscal headaches as soon as next year,” the Wall Street Journal observed. “The state is constitutionally required to spend more on public education as revenue increases. This year’s revenue will establish a spending base for next year, meaning it could be harder for the state to balance its budget if the state’s income declines.”

Brown has made his reputation as governor holding the line on spending against steady pressure from his left. But Brown’s own favorite projects, including California’s high-speed rail plan, received his unwavering support, even drawing money away from expenditures favored by activists.

A selective windfall

Now, Brown has chosen to walk the budget tightrope in a way that will encourage his more profligate allies. Beneficiaries of Brown’s revised budget were set to include poorer Californians, unlawful immigrants and college students, as the San Jose Mercury News reported:

“With billions in better-than-expected revenue, Brown unveiled a $115.3 billion general fund spending plan that creates the state’s first-ever ‘earned income tax credit’ and would pay for Medi-Cal for some immigrants living in the state illegally.”

Brown’s revision also slipped in the results of a long-belabored deal with UC President Janet Napolitano, “who had demanded tens of millions of dollars more for her system to stave off 5 percent tuition hikes in each of the next five years,” as the Mercury News recalled.

But the revised budget plan went well beyond those measures, touching policy areas that have bedeviled Brown throughout much of his time in office.

Prison reform

Brown, for instance, used the revision to forge ahead with reforms to California’s prison system, which has been a virtual albatross around his neck since the Supreme Court ordered the state to reduce its crowded incarcerated population.

As the Los Angeles Times reported, the new budget revision “calls for shrinking the number of inmates housed outside California in the next year by 4,000 — reducing related state spending by $73 million. As of this week, the state had a little more than 8,000 inmates in private prisons in Arizona, Mississippi and Oklahoma, and another 6,250 prisoners in contracted lockups within the state.”

According to the Times, the cuts became possible because of the impact of Proposition 47, which thinned prisons’ ranks largely by slashing penalties and jail time for drug-related offenses. As CalWatchdog previously reported, although relatively few donors fueled the measure, Prop. 47 won the support of a substantial majority of voters in November.

Mixed reactions

In what has become a hallmark of his tenure in office, reactions to Brown’s adjusted numbers mixed praise with criticism. “We applaud the governor for putting money back into the pockets of those who work hard every day and pay their taxes – it’s the right move,” remarked Assembly Republican Leader Kristin Olsen, R-Riverbank, according to the Sacramento Bee. But, she added, Brown’s tax credit “will not end widespread poverty. That’s why Assembly Republicans have offered straightforward solutions to reform education and support the modern economy so every Californian can boost their earnings and quality of life.”

From the other side of the aisle, some Democrats registered disappointment with the limitations of Brown’s agreement on school funding. “We are pleased UC students and their families will avoid paying higher tuition next year,” said Senate President Pro Tem Kevin de León, D-Los Angeles. “But CSU, the workhorse of our higher education system, has been shortchanged. We have to support both of our public institutions of higher learning to make sure college is accessible to as many Californians as possible.”

Originally published by CalWatchdog.com

Schools Look to Gobble Up Surging State Revenues

shocked-kid-apAs Gov. Jerry Brown prepares to release his revised state budget for the coming fiscal year next week, educators around the state are looking forward to hearing about the additional funds they will receive, a dramatic departure from the bleak years of the recession, when they braced themselves for further cuts.

Even for the state’s most experienced school finance experts, predicting how much California’s schools will get in new revenues is a next to impossible task.

This year the task is especially challenging because of the unanticipated interplay between two voter-approved initiatives – Proposition 98, approved by voters in 1988, and Proposition 2, championed by Brown and approved by voters just last November – on top of many unknowns about how much tax revenue the state will generate from a variety of sources.

One thing is clear: Schools and community colleges will be the big – and possibly only – winners when it comes to dividing up the extra revenues.

The Legislative Analyst’s Office and others estimate that California’s surging economy could generate between $4 and $8 billion more than the state had projected.

“Schools are the big winner,” Mac Taylor, the state’s legislative analyst, said at EdSource’s 2015 symposium, held last week in Sacramento in collaboration with the California State PTA.

The additional funds will arrive at a welcome time for schools, which are still digging out from the impact of deep cuts made during the recession. Schools are also implementing a range of reforms, including the Common Core State Standards and the Local Control Funding Formula, which prescribes eight priority areas in which school districts are expected to show improvement.

Complicating how the new revenues will be allocated is the unanticipated interplay of Prop. 98 and Prop. 2, which could result in all non-education social services and state government departments winding up with little additional money or none at all.

That’s because Prop. 98, setting the minimum levels of school funding, requires that the state’s first priority in revenue-rich years is to bring funding levels for schools and community colleges up to the level they would have enjoyed if there had not been a recession. That amount, called the “maintenance factor,” currently totals $2.6 billion.

Prop. 2, meanwhile, mandates that the state set aside the first 1.5 percent of state revenue, plus additional dollars when the state is flush with tax receipts from capital gains, to pay down state debt and build a rainy-day fund. Money for Prop. 2 would be diverted from funding for non-education programs and services.

“It is a very unusual situation for my bosses – the members of the Legislature and the governor – that they may have to deal with this very strange world,” Taylor said. “They will have to take some actions to balance all the competing demands.”

Under one possible scenario that Taylor and the LAO laid out, the non-Prop. 98 side of the budget could receive $1 billion less next year than they got this year, possibly even requiring spending cuts that would put the Legislature in a bind and pit school advocates against a range of other interest groups. Taylor said programs subject to cuts could range from health and social services to higher education and criminal justice programs.

“There are many scenarios where the bottom line will be worse, where the Legislature will have to act to bring the budget in balance,” Taylor said.

Mike Herald, legislative advocate for the Western Center on Law and Poverty in Sacramento, said he expected legislators would find it “unpalatable” to reduce funding for human services in a year where there is going to be a substantial surplus. “It’s hard to explain to disabled adults surviving at poverty levels on Supplemental Security Income that they can’t get any increases for food when there are billions of dollars more in state revenue,” Herald said.

Brown’s budget for next year, which he proposed in January, assumed $7.8 billion more from Prop. 98 through a combination of increased state and property tax revenues for 2014-15 and 2015-16. About $4 billion of that will go toward ongoing funding for the Local Control Funding Formula, which provides extra money to school districts with high numbers of low-income children, foster youth and English learners.

“That is an enormous amount of new money in a relatively short period of time,” Taylor pointed out.

But school districts also face rising expenses, including increases in pension obligations for teachers and administrators that will be phased in, reaching $3.7 billion more per year by 2020-21.

Taylor noted that despite the massive inflow of funds to the schools in inflation-adjusted dollars, schools will only receive on average about $200 more per student than they did in the  2007-08 school year, when funding peaked.

“But if you think about what we went through, the worst recession in decades, the fact that we have bounced back and are above where we were at the beginning of the Great Recession, that is not bad,” he said.

Louis Freedberg is the executive director at EdSource. Email him or Follow him on Twitter.

John Fensterwald covers education policy.

This piece was originally published by EdSource

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