‘Think Long’ Group Short On Serious Ideas

Would California be in better shape if former governors Arnold Schwarzenegger or Gray Davis, or former Assembly Speaker Willie Brown were back in power? That’s an odd question given the fiscal mess that those politicians helped create, or at least were powerless to fix.

These politicos had their chance at the pinnacles of power, yet they blew it. Schwarzenegger was elected in a historic recall, yet he left the state in a more precarious position than when he assumed power.

Davis and Brown were advocates for the big-spending, pro-public-sector-union policies that turned California’s government into a bloated mess. No one in the media would champion returning these former leaders to power. Yet the media are championing a new “Blueprint to Renew California” based on the year-long work of a commission dominated by these and other has-been politicians.

The report, released Nov. 21 by the Think Long Committee for California, purports to provide out-of-the-box solutions. The committee is a who’s who of the California political establishment.

Members include Davis and Willie Brown and included input from Schwarzenegger, Jerry Brown and Lt. Gov. Gavin Newsom. One won’t find many real reformers in the bunch.

The only thing sillier than expecting this group to fix what ails California is the big idea unveiled by the committee, which amounts to a $10 billion annual tax increase on California residents. After a year, the best it could do is come up with a plan based on the same failed ideas that are fashionable in the Capitol all the time —- hiking taxes on ordinary Californians to spare the state bureaucracy the pain of the cutting knife.

That isn’t thinking long. It’s thinking small. The most dangerous idea is a proposal to place a sales tax on every service in the state except for health care and education. That will mean that the cost of living here will go up, as everything from haircuts to lawn services will carry an additional tax. Even if the tax starts small, it will grow, given the spending tendencies typical in this state’s governments. The plan would eliminate most income-tax deductions, not including the mortgage deduction and a few other exemptions.

Sales tax rates would drop slightly as would corporate tax rates. But virtually everyone would pay more in their overall tax bill although the reform would reduce income taxes for wealthier Californians.

The committee would end the Proposition 98 guarantee that 40 percent of the state budget go to K-14 education, but then it promises the school establishment an increase in education funding from other sources.

There’s no talk about educational choice or reform.

The committee plans to place two initiatives on the November 2012 ballot, backed by billionaire financier Nicolas Berggruen. He is the latest in a long line of wealthy folks who come up with “state-saving” plans that end up taxing us more and rearranging the arm chairs around the 1,000-pound gorillas in the living room.

The committee’s 23-page report also includes some detailed suggestions for improving the state government and reducing gridlock. Some of the ideas are OK as far as they go, but they rarely challenge establishment thinking. The report mentions the unsustainability of public-sector pensions but offers the lamest solution: “We recommend that the governor, legislature and local government officials make it the highest priority to work with public employee unions to find ways to address the long-term costs of pensions and the unfunded liabilities that have already been built up.” Thanks very much for that great advice! The commission spent a year coming up with detailed ways to increase taxes, but the best its members could do on the pension crisis is to call on officials to work with reform-averse unions to come up with unspecified reforms.

The committee proposes the creation of a “Citizens Council for Government Accountability,” a toothless good-government body with amorphous goals. The committee would be “an independent, impartial and non-partisan body” that would “develop a vision encompassing long-term goals for California’s future.” This council would “be tasked with charting, coordinating, shepherding and sustaining an integrated strategy … aimed at creating educational excellence, world-class infrastructure, environmental quality” and blah, blah, blah.

There’s no call for reducing government or creating competitive pressures on the monopoly systems that provide state services so poorly. If this council is populated by the same type of folks who populate the Think Long Committee, we will find yet another arm of government devoted to higher taxes and bigger government.

Some of the committee’s budget and oversight reforms are fine, but of the insufficient variety that short-thinking reformers always come up with —- multi-year budgeting, a rainy day fund, a two-year-legislative session, pay-as-you-go legislation and a modification of term limits.

The committee wants to use the initiative process to implement its ideas, but also wants to reduce the ability of ordinary California voters to use the initiative process for themselves. The committee “supports a constitutional amendment to allow the Legislature to review pending initiative proposals and to fix flaws.” Not only is this elitist —- the Legislature knows best! —- but it’s dishonest. The Legislature would gut those initiatives it doesn’t like (i.e., anything that limits taxes or government power). The committee also wants to increase the number of signatures needed to qualify an initiative for the ballot.

There’s other discussions about “accelerating” the environmental review process, and for spending more money on the state’s admittedly dilapidated infrastructure and for higher education. Yet the establishment thinkers behind this report don’t recognize the inflationary affect of government spending on educational costs or the degree to which California’s infrastructure has crumbled because government has been misspending its vast resources.

If this is thinking long, then I’d hate to see the group’s short-term proposals.

(Steven Greenhut is the Editor-in-Chief for CalWatchdog, where this article was first posted. Greenhut was deputy editor and columnist for The Orange County Register for 11 years.)

When worst-case economic ‘unthinkables’ become reality

When the chief executive of a global investment firm that manages assets in the neighborhood of $1.4 trillion calls current economic goings-on “unsettling,” it is probably wise to take heed. That’s precisely what Pacific Investment Management Co. CEO and Co-CIO Mohamed A. El-Erian told an audience of more than 200 people at the Big Canyon Country Club in Newport Beach. This is “not just normal volatility,” he said referring to recent turbulence in the financial markets, it’s “unsettling.”

El-Erian’s address Nov. 17 was a diagnosis of current economic woes, their causes and general observations about what might create laudable economic growth and quell global markets.

What concerns El-Erian and his colleagues at Newport Beach-based PIMCO are what the company terms “unthinkables,” those worst-case scenarios of economic upheaval. Some “unthinkables” became reality in the third quarter of this year, El-Erian observed, such as the United States losing its AAA credit rating and U.S. policymakers flirting with a technical default.

Many of the problems are political, some are social. But the problems have been a long time coming and recent social discontent manifested through global social movements further highlights challenges facing the global economy.

(Read Full Article)

(Brian Calle is an Opinion Columnist and Blogger for the Orange County Register. His blog is called Uncommon Ground.)

Is there any hope for California businesses?

The workers comp issue is likely to heat up in the legislature — again. The big question this time: How many businesses will fight and how many will run right out of the state?

A week ago, Sacramento Bee columnist, Dan Walters, wrote about the perennialstruggle over workers compensation. Labor unions, employers, insurers, attorneys and medical care providers constantly battle for a financial advantage in the area of worker related injury and payments. Walters noted that a new move would be made against employers who gained from reductions in workers comp costs under the Schwarzenegger administration.

I remember that last workers comp debate well. I was the proponent of an initiative to lower workers comp costs for businesses. Governor Schwarzenegger used the initiative to convince legislators to come to the negotiating table and work out an agreement to reform the system and cut costs.

Had the negotiation not been successful, I’m convinced the initiative would have passed. Company owners, especially small businesses, were angry. I saw it everywhere I went in trying to drum up support for the initiative. And I went everywhere. I remember a large turnout late at night in the oil fields near Taft.

Big business was concerned as well. All business spoke with a unified voice. The California Chamber of Commerce had broken precedent during the recall election by endorsing a gubernatorial candidate for the first time under the belief that California needed a business friendly chief executive who, among other things, would reform the workers comp system.

Economic development officials from other states were trying to convince California businesses to come to their states boasting of their much lower workers comp rates. States like Idaho boldly advertized their “escape from California” ads in state and local business journals.

Businesses fought back with the initiative and supported Schwarzenegger’s efforts.

If workers comp is adjusted again, if the unions, attorneys, and providers convince the legislature and governor to shift a bigger burden on business, will the business community be as resolute as before?

After being battered by the poor economy, more regulations, the threat of increased taxes, will a dramatic increase in workers comp costs convince businesses that California is hopeless for business?

It is possible that should an increase of workers comp costs occur, many businesses might just throw in the towel and respond to those ads that other states are certain to start running in the business journals again.

(Joel Fox is the President of the Small Business Action Committee and Editor of Fox & Hounds, where this article was first published.)

Billionaire Wants Green Tax On Others

It was socialist playwright George Bernard Shaw who once wrote that “if you Rob Peter to pay Paul, you can always depend on the support of Paul.”  Put in terms of the mob hysteria of the Occupy Movement, if you rob the 1 percent to pay the 99 percent you can always depend on the support of the 99 percent.

There is one big problem with this: you can’t take Peter’s wealth and transfer it to Paul under the U.S. Constitution unless it is for a public purpose and you provide just compensation.  Except in the kleptocratic state of California where so much plundering of people’s wealth is going on under the guise of a green, redevelopment or public health agenda that it has become taken for granted that one can do so. The line that demarcates what’s mine and what’s yours has become so blurred that there is no longer any shame of using laws or tax initiatives for public greed.

Into this environment where Peter can legally rob Paul comes Tom Steyer, a CalPERS external fund manager and head of Farallon Investments that holds a number of green stocks in its investment portfolio.  Steyer is a billionaire who is definitely in the 1 percent category who opposed Prop. 23 on the Nov. 2010 ballot to suspend green power.  Steyer never disclosed that he would benefit from the continuation of California’s green power law AB 32.

Steyer has proposed a new ballot initiative for the 2012 election that would impose a $1.1 billion tax on out-of-state companies doing business in California to rectify a supposed loophole in the tax code.  Steyer’s proposed tax would first take half of the tax proceeds for green projects and jobs that would no doubt prop up his and CalPERs’ investment portfolio.  If this self-dealing doesn’t qualify as serving a public interest, the other half of the tax proceeds would go to funding public schools.

This is much like redevelopment where a city can take private property and give it to a politically connected private developer to make a killing on upzoning your land for a purported public purpose. But even the State Legislative Analyst has stated that redevelopment just takes new development from one neighborhood or city and transfers it to another rather than creating new real added wealth.

It’s as if CalPERS, via Tom Steyer, has come up with a strategy to replenish its declining pension fund now that the U.S. Federal Reserve has dropped interest rates to zero: just get the 99 percent of the voters — actually two-thirds of the voters — to agree to a tax on 1 percent of the businesses that will benefit your investment firm, CalPERS’ pension fund, and public schools, and call it a tax for a legitimate public purpose.

After all, those “greedy” out-of-state companies are supposedly milking the big California market by other state governments allowing them more favorable tax treatment than does California. But then again, about 99 percent of the states have more favorable taxes for its businesses and residents than California. That is not a loophole as much as it just is just California’s government greed. If California is able to define a loophole as any outside state tax rate or rule that is more favorable to the taxpayer than California’s then just about everything is a loophole.

Neither Tom Steyer nor the Occupy Movement in California has spoken up about how Gov. Brown’s automatic “triggers” in the state budget rob from the poor and give to the rich.

Even liberal journalist Joe Mathews who has written a book about how California is structurally dysfunctional and needs more taxes, has a big problem with Steyer skimming one half of the tax off the top for his own green investments, leaving maybe the other half for public schools or other pressing needs of the state.  If Tom Steyer and CalPERS are  able to get away with influencing the public to vote for this new law where will it end?  There would be nearly no limits on the rapaciousness of government.

(Wayne Lusvardi is a Political Commentator. This article was first posted  on CalWatchdog.)

The Folly of Debt

As debt issues in Europe continue to plague the world markets, European nations teeter on complete fiscal collapse.  Similarly, many U.S. states are likewise under immense fiscal pressures because of their debt.  Annual budget gimmicks and accounting tricks utilized by state governments often result in an unrealistic portrayal of the state’s actual financial situation. These budgetary practices have helped orchestrate the structural deficits inherent in many state budgets – specifically California’s.  One group who has worked to reveal the states’ actual fiscal conditions is the State Budget Solutions.  In its efforts to remove the budget veil, State Budget Solutions (SBS) has designed a study that defines a state’s total debt as the sum of outstanding official debt, pension liabilities, Unemployment Trust Fund loans, and current budget gap. This method provides a more accurate picture of what a state actually owes.

In October, SBS released its report that found the actual combined debt of all 50 states amounts to more than $4 trillion. Not surprisingly, California ranks first, as the state with the greatest amount of debt.  According to the study, California’s total debt is $612 billion, over twice that of New York’s, the second worst state on the list; in fact, California’s debt is greater than the top twenty-five states combined.

The fact that California has been able to amass this level of financial obligation stems directly from the inability of legislative Democrats to curb spending and produce a “real” fiscally responsible and balanced budget. Too often politicians view debt as a mere inconvenience, rather than a serious problem. While families across California make tough decisions and sacrifices in order to ensure they are able to meet their financial obligations, state government continues to spend taxpayer dollars as if the same rules do not apply to them.

The recent release of the Legislative Analyst’s Office (LAO) Budget Outlook points out what most observers already knew, last year’s gimmick-filled budget would fail to meet projections.  Based on the LAO’s analysis, California will face at least a $13 billion deficit in the 2012-13 budget year.  Another unbalanced budget will again contribute to the state’s growing debt. Continuing down this unsustainable path will ultimately result in further loss of credibility, a poor credit rating, long-term insolvency, and a weakened economic recovery. These are burdens we should make every effort to avoid placing on the next generation.

In order to reverse this cycle, California lawmakers must be willing to prioritize spending and make tough decisions. $612 billion in total state debt cannot be overcome with superficial “changes”; it requires sacrifice and a commitment to find real solutions. Resolving the state’s unfunded pension liabilities must be at the top of the list since pension debt not only threatens California’s creditworthiness, it also jeopardizes future retirement benefits. Once substantial improvements are in place to curb abuses and create a balanced approach to retirement compensation, the cost savings can then be used to pay down accrued debt. Until the Legislature decides to take this problem seriously and act sooner rather than later, it will continue to threaten the financial stability of state government while also stifling California’s economic recovery. It is time to do what is best for the future of California: reduce spending to consistent sustainable levels and reduce the state’s crushing debt.

(Senator Mimi Walters is the California State Senator representing the 33rd Senate District. This article was first posted on Fox & Hounds.)

A Tax Code for Tomorrow: We need to encourage investment, not penalize it

Warren Buffett is worried that he doesn’t pay enough in taxes. In an August op-ed in the New York Times, the billionaire pointed out that his effective federal tax rate—the percentage of all his income that he paid in federal tax—was just 17.4 percent. The reason for Buffett’s light burden is that he gets so much of his income from investments in company stocks, which are taxed comparatively lightly: while the federal tax rate for wage income can rise as high as 35 percent, most income from stocks is taxed at a flat 15 percent.

Seizing on Buffett’s complaint, President Barack Obama has proposed the “Buffett Rule,” which would compel millionaires to pay as great a share of their incomes as lower earners do, effectively taxing their capital gains and dividends more. It’s easy to see the intuitive appeal of raising taxes on capital income. Also in August, business columnist James Stewart wrote in the Times that “simple fairness” was the best argument for taxing capital gains at ordinary income rates. He quoted economist Leonard Burman: “In my experience earning income from capital gains is a lot easier than earning ordinary income. Why not tax both at the same rate? It only seems fair.” Most tax-reform proposals today likewise seek to raise taxes on capital.

What they seem not to understand, though, is that the current tax code doesn’t reward investing in capital; it punishes it. By further discouraging the investment that the recession-damaged economy needs to innovate and grow, the Buffett Rule would take the tax code in exactly the wrong direction. For the good of the country, as surprising as it may sound, Warren Buffett ought to get a tax cut.

Buffett’s 17.4 percent claim is deceptive. While the figure includes his personal income tax, as well as payroll taxes for Medicare and Social Security, it doesn’t include another levy that he pays, albeit indirectly: the corporate income tax. The money that Buffett makes as an investor is simply a share of the profits of the companies whose stock he owns. Those companies have already paid the corporate income tax—as much as 35 percent of their incomes—which dramatically reduces their profits, and thus Buffett’s take.

Another way of looking at this is to remember that a shareholder is a part owner of a company. In the current tax system, he’s essentially paying taxes twice: first as corporate income tax, and second as personal capital-gains or dividend tax. Because of this double taxation, the tax code winds up treating investing less favorably than labor. In 2005, the Congressional Budget Office, adding together the corporate- and personal-level taxes, estimated that the total federal tax burden on capital investments in corporations was 26.3 percent. Personal income and payroll taxes, by contrast, accounted for just 17 percent of personal income that year.

That Buffett pays way more than 17.4 percent in federal levies, once you include the corporate income tax, is less important than what the double-taxing of capital does to the economy: it gives people an incentive to shift their money from investing to consumption. One of the biggest problems that the U.S. economy struggles with is too much spending and too little saving and investing; the tax code should work against this trend, not exacerbate it.

Our current tax system introduces a further distortion by allowing corporations, when they issue debt, to deduct the interest payments from their taxable income. These deductions are so valuable that the total federal tax burden on corporate debt is negative 6.3 percent, according to the CBO—meaning that corporations receive a subsidy for their debt-financed activities. This subsidy spurs them to finance themselves more with debt and less with equity, increasing the risk of corporate bankruptcy.

Obama’s Buffett Rule would worsen both the double-taxing problem and the debt-subsidy problem. Hiking personal income-tax rates on capital-gains and dividend income, as the rule would require, would give potential investors even more reason not to invest. And because it would mainly affect taxation of stocks, not bonds, it would increase the disparity between the two, further encouraging companies to issue debt. Nor is Obama alone. Many recent bipartisan tax plans, including the generally sensible one developed by the White House’s fiscal commission, headed by Erskine Bowles and Alan Simpson, have called for taxing dividend and capital-gains income at the same rates as wage income.

Why are today’s tax reformers pushing in the wrong direction on capital taxation? There’s the fairness argument, of course, and also its cousin, the progressive argument: because people with high incomes disproportionately receive capital income, less favorable treatment of capital tends to make the tax code more progressive (at least if you assume that the tax burden on capital is borne solely by investors and not by companies’ employees and consumers, who will have to shoulder lower salaries and higher costs).

Some reformers, too, want to tax investments at higher rates so that they can lower the top individual tax rate on wage income. One option that the Bowles-Simpson plan proposes, for example, reduces the top rate on all income to 23 percent and still raises more revenue than today’s tax code does. But it can only accomplish that feat because it hikes capital-gains and dividend taxes while leaving corporate income taxes in place, though at a somewhat reduced rate. The Bowles-Simpson plan’s true effective tax rate on investment would be higher than today’s—well over 30 percent.

A better tax-reform plan would cut tax rates on capital, rather than simply cutting tax rates broadly. A key principle of this approach: all income would be taxed only once, so that people’s and businesses’ decisions would be distorted as little as possible.

There are a few ways of achieving such neutrality. One, recommended by staff at the Treasury Department in the 1990s, is the adoption of a comprehensive business income tax (CBIT). Under this system, businesses would no longer be allowed to deduct their interest expenses from their taxable income, but individual investors and bondholders—the people ultimately receiving that business income, whether from stocks or from bonds—wouldn’t have to pay taxes on it. So the money would be taxed just once. Further, because the CBIT would apply equally to corporate debt and corporate equity, it would remove companies’ incentive to borrow too much. However, a CBIT would make it impossible to tax capital income progressively: since the single tax would be paid at the corporate level, wealthier shareholders and bondholders couldn’t be made to pay more.

Another option, widely used in other Western countries, is an “imputation-credit” system. Corporations would still pay income taxes, but those who received dividends from those corporations would then deduct the corporate taxes from their taxable income. In many cases, such a rule is the equivalent of eliminating taxes on dividends.

A third option would be to stop taxing income entirely and to tax consumption instead. New York University professor David Bradford suggested a system called the “X tax,” in which both businesses and individuals would pay an income tax—but individuals, crucially, would pay no tax on interest, dividends, or capital gains. Since people can do only two things with their income—invest it or spend it—a government that taxes income without taxing capital is imposing the equivalent of a consumption tax. The businesses, meanwhile, would pay taxes on the revenue that they took in from customers—again, this would be a consumption tax—but subtract from their taxable income whatever they bought from other businesses, as well as what they paid their employees. Though its operation is significantly different, the base of the X tax is the same as that of a value-added tax (VAT). But unlike with a VAT, the government could levy tax at lower rates for lower-wage individual earners, introducing progressivity and potentially drawing some Democratic support to the plan.

Any of these reforms, of course, would bear a price, since the government would lose revenue by no longer double-taxing capital. To help make up for the gap, the top tax rate on individual wage income, for starters, would need to remain in the neighborhood of today’s 35 percent rate, instead of the much lower rates envisioned in the Bowles-Simpson plan. But by eliminating various tax credits and deductions, such as the deductions for state and local taxes paid and for mortgage interest, the government could pay for reform and even afford to set lower rates for lower- and middle-income earners. Better still, it could increase the earned income tax credit, a benefit that the very lowest wage earners receive.

Because these reforms would reduce or even eliminate the taxes that investors pay on capital income, Warren Buffett’s tax bill would be smaller than it is today. Some other investors with extremely high incomes would likewise be better off. But the tax burden wouldn’t be shifted to the middle class and the poor. Rather, the brunt would be borne by wage earners in the top quintile—partners in law firms and corporate executives, for instance—who have labor income taxed in the top bracket and who tend to benefit heavily from tax deductions.

If you think that tax reform should be solely about lower marginal rates, none of these proposals will be music to your ears. It’s important to remember, though, that one reason that we care about lowering marginal tax rates is that higher rates squelch economic activity—and capital is more sensitive to that effect than labor is, in part because capital can so easily flee to lower-tax jurisdictions. Tax the income of a corporate lawyer, and he’ll probably keep working, at least up to a certain point. Tax the stocks of an investor, and he may consider investing in firms located abroad, thus avoiding the corporate tax altogether and depriving the U.S. of investment capital.

This broad principle of reform—lower taxes on investment income, financed with taxes on labor income earned by the affluent—could appeal to both sides of the aisle. Such a big change may look like a heavy lift. But it’s worth remembering that the Tax Reform Act of 1986, which made many useful changes to the tax system, looked impossible until it became law. Better policy may be more feasible than it appears. And the long-term economic effects of reform along these lines would be profound: better incentives for business investment and job creation, fewer incentives for businesses and individuals to pile up debt—and faster long-run economic growth.

(Josh Barro is the Walter B. Wriston Fellow at the Manhattan Institute. This article was first posted on City Journal.)

On Tyranny and Liberty: Would the Founders approve of the nation we’ve made?

A U.S. Supreme Court justice recounted over cocktails a while ago his travails with his hometown zoning board. He wanted to build an addition onto his house, containing what the plans described as a home office, but he met truculent and lengthy resistance. This is a residential area, a zoning official blustered—no businesses allowed. The judge mildly explained that he would not be running a business from the new room; he would be using it as a study. Well, challenged the suspicious official, what business are you in? I work for the government, the justice replied. Okay, the official finally conceded—grudgingly, as if conferring an immense and special discretionary favor; we’ll let it go by this time. But, he snapped in conclusion, don’t ever expletive-deleted with us again.

Isn’t that sort of petty tyranny? I asked.

Yes, the justice replied; there’s a lot of it going around.

Tyranny isn’t a word you hear often, certainly not in conversations about the First World. But as American voters mull over the election campaign now under way, they’re more than usually inclined to ponder first principles and ask what kind of country the Founding Fathers envisioned. As voters’ frequent invocations of the Boston Tea Party recall, the Founding began with a negation, a statement of what the colonists didn’t want. They didn’t want tyranny: by which they meant, not a blood-dripping, rack-and-gridiron Inquisition, but merely taxation without representation—and they went to war against it. “The Parliament of Great Britain,” George Washington wrote a friend as he moved toward taking up arms several months after the Tea Party, “hath no more Right to put their hands into my Pocket without my consent, than I have to put my hands into your’s, for money.”

With independence won, the Founders struggled to create a “free government,” fully understanding the novelty and difficulty of that oxymoronic task. James Madison laid out the problem in Federalist 51. “Because men are not angels,” he explained, they need government to prevent them, by force when necessary, from invading the lives, property, and liberty of their fellow citizens. But the same non-angelic human nature that makes us need government to protect liberty and property, he observed, can lead the men who wield government’s coercive machinery to use it tyrannically—even in a democracy, where a popularly elected majority can gang up to deprive other citizens of fundamental rights that their Creator gave them. In writing the Constitution, Madison and his fellow Framers sought to build a government strong enough to do its essential tasks well, without degenerating into what Continental Congress president Richard Henry Lee termed an “elective despotism.” It’s to ward off tyranny that the Constitution strictly limits and defines the central government’s powers, and splits up its power into several branches and among many officers, all jealously watching one another to prevent abuse.

When we ask how our current political state of affairs measures up to the Founders’ standard, we usually find ourselves discussing whether a given law or program is constitutional, and soon enough get tangled in precedents and lawyerly rigmarole. But let’s frame the question a little differently: How far does present-day America meet the Founders’ ideal of free government, protecting individual liberty while avoiding what they considered tyranny? A few specific examples will serve as a gauge.

The Supreme Court’s 2005 Kelo v. City of New London decision is notorious enough, but it bears recalling in this connection, for the whole episode is objectionable in so many monitory ways. In the year 2000, the frayed Connecticut city had conceived a grandiose project to redevelop 90 waterfront acres, in conjunction with pharmaceutical giant Pfizer’s plan to build an adjoining $300 million research center. A conference hotel—that inevitable (and almost inevitably uneconomic) nostrum of urban economic-development authorities—would rise, surrounded by upscale housing, shopping, and restaurants, all adorned with a marina and a promenade along the Thames River. Promising to create more than 3,000 new jobs and add $1.2 million in revenues to the city’s declining tax rolls, the redevelopment authority set about buying up the private houses, mostly old and modest, on the site.

Several homeowners refused to sell, however. They loved their houses and their water views. In response, the determined city seized their property under its power of eminent domain. One resident, Susette Kelo, wasn’t giving up her little pink house without a fight, though, and she, along with a few neighbors (including one who’d lived in her house since 1918), sued the city in the state courts, claiming that its action violated the Fifth Amendment’s guarantee that no person shall “be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.” The trial court agreed with Kelo’s reasonable assertion of the government’s fundamental duty to protect rather than invade private property, but the state appeals court disagreed, and ultimately the U.S. Supreme Court upheld the city’s seizure, 5–4.

The Supreme Court’s opinions, on both sides, lay out a dreary history of how a fundamental liberty shriveled. The justices cite a 1954 precedent that imperiously expanded the rationale for eminent domain from the Fifth Amendment’s public use to public purpose to justify urban-renewal projects that tore down vast swathes of supposedly blighted property in order to turn the land over to private developers of better housing. Even if you grant the constitutionality of the new rationale, argued the petitioner in this case—who owned a prospering, unblighted department store within the redevelopment area—creating a “better balanced, more attractive community” was not a valid public purpose. Wrong, said the Supremes, in Justice William O. Douglas’s trademark fatuously whimsical language: the legislature, invoking values that are “spiritual as well as physical, aesthetic as well as monetary,” has the power “to determine that the community should be beautiful as well as healthy, spacious as well as clean, well-balanced as well as carefully patrolled.” Nor need officials, evidently empowered to define public purposes beyond the Constitution’s limited and enumerated scope, deal with property owners on an individual basis in imposing their aesthetic vision on already existing property, so the department-store owner’s liberty and property rights merit no protection from the redevelopment juggernaut.

The Kelo Court also cited a precedent, appropriately from 1984, that is hard to distinguish from a Latin American Communist-imposed land-reform scheme. Because the government owned 49 percent of Hawaii’s land and 72 private landlords owned another 47 percent of it, the state legislature passed a law forcing the private property owners to sell their land to their lessees, for just compensation. The public purpose of this social-engineering megaproject: “eliminating the ‘social and economic evils of a land oligopoly.’ ” Trying to explain his notion of “the tyranny of the majority,” the great democratic danger that he’d designed the Constitution to prevent, Madison began by observing that “those who hold, and those who are without property, have ever formed distinct interests in society.” As the propertyless will always outnumber the propertied, the essence of democratic tyranny is for the poorer many to expropriate the richer few by such “improper or wicked” schemes as voting “an equal division of property,” the furthest-out extreme of tyranny that the Father of the Constitution could imagine. What would he have said about the Hawaii legislature’s property-redistribution edict and the U.S. Supreme Court that ratified it on such a rationale?

Kelo, as the dissenting justices pointed out, makes almost limitless the government’s eminent-domain power. While the Fifth Amendment envisioned transferring one private owner’s property to another—for reasonable compensation—for a turnpike or a canal to which the entire citizenry had access (or, later, a railroad or electricity-transmission line), the 1954 and 1984 precedents that the Court cites at least claimed that the transfer accomplished the direct public purpose of ending a harmful use of property, if only by association in the case of the unblighted department store surrounded by blight. But no one claims that Susette Kelo’s house—or her neighbors’—is blighted, the dissenters observed. The public purpose of “tak[ing] private property currently put to ordinary private use, and giv[ing] it over for new, ordinary private use” is the indirect, secondary one of raising New London’s tax base, meaning that government could order any property razed for a higher-value one, sweeping away single-family houses (especially humble ones) for apartment buildings, churches for stores, or small businesses for national chains. And, the dissenting justices might have added, it makes government officials interested, rather than neutral, parties, since more tax revenue means better pay, health care, and pensions for them.

In 1812, the nation’s retired first chief justice, John Jay, commented on a proposal to take by eminent domain some fields near his Westchester farm and flood them to make a millpond to turn a factory waterwheel. “When a piece of ground is wanted for a use important to the State, I know that the State has a right to take it from the owner, on paying the full value of it; but certainly the Legislature has no right to compel a freeholder to part with his land to any of his fellow-citizens, nor to deprive him of the use of it, in order to accommodate one or more of his neighbours in the prosecution of their particular trade or business,” he wrote. “Such an act, by violating the rights of property, would be a most dangerous precedent.” As for flooding the fields: “It may be said that the pond, by facilitating manufactures, will be productive of good to the public; but will it not produce more loss than gain, if any of the essential rights of freemen are to be sunk in it?” By 1885, however, many states had passed “mill acts,” permitting just such a use of eminent domain to power gristmills—required, like turnpikes and railroads, to serve all comers.

As it happened, getting rid of Susette Kelo’s house—ultimately, New London moved it from its waterfront site rather than demolish it—produced no gain to anyone. In the wake of a merger, Pfizer moved its research facility elsewhere; the redevelopment agency couldn’t raise the necessary financing for the rest of the project, which Pfizer’s withdrawal rendered problematic; and the land sits vacant, generating not a nickel of tax revenue. The only good the decision produced was a slew of laws in many other states severely limiting the use of eminent domain for economic development. In New York, one of eight states without such limits, the official wresting of unblighted property from one ordinary private owner to another politically powerful one for private use continues unabated.

In framing the Constitution, once the Revolution had stopped the tyranny of taxation without representation, Madison realized that even in a self-governing republic, taxes remained the chief source of potential abuse. “The apportionment of taxes on the various descriptions of property, is an act which seems to require the most exact impartiality,” he wrote, “yet there is perhaps no legislative act in which greater opportunity and temptation are given to a predominant party, to trample on the rules of justice. Every shilling with which they overburden the inferior number, is a shilling saved to their own pockets.” A steeply “progressive” tax system, in which the rich pay not just a higher amount but pay at a higher rate than the less affluent, would have troubled him as much as a system whose loopholes allow some rich citizens to pay proportionally less, and he would have heard with dismay—though not with total astonishment, since it was just this kind of danger he knew the country faced—that 47 percent of tax filers now pay no income tax.

But what he could never have imagined is that judges—rather than the legislature—would impose a new system of taxation without representation, a modern tyranny of which the most outrageous of several examples is the New Jersey Supreme Court’s Abbott v. Burke case, still going on after more than a quarter-century. Based on the state constitution’s boilerplate call for the legislature to “provide for the maintenance and support of a thorough and efficient system of free public schools for the instruction of all the children in the State between the ages of five and eighteen years,” the court, in a string of 21 decisions starting in 1985, set out to use the schools to rescue the children of New Jersey’s urban underclass, cost be damned.

The court claimed to know just how Herculean a task it was taking on. Inner-city kids in Newark, Trenton, Camden, and so on had “needs that palpably undercut their capacity to learn,” the judges noted. “Those needs go beyond educational needs[;] they include food, clothing and shelter, and extend to lack of close family and community ties and support and lack of helpful role models.” The children live “in an environment of violence, poverty, and despair, . . . isolated from the mainstream of society. Education forms only a small part of their home life,” and dropping out of school “is almost the norm. . . . The goal is to motivate them, to wipe out their disadvantages as much as a school district can, and to give them an educational opportunity that will enable them to use their innate ability.”

What will accomplish this vast work of cultural and social repair? The judges had read their Jonathan Kozol, they noted, and what they took away from the fanciful, far-left education ideologue’s Savage Inequalities, which compares some of the worst urban high schools—including one in Camden, New Jersey—with some of their very best suburban counterparts, is that the chief difference between successful schools and failed ones is money.

So, flinging aside the concept of separation of powers, the court ordered the legislature to hike its support for specified inner-city districts—and not by the relatively modest amount that the legislature calculated would help these schools meet performance standards it thought reasonable, but rather by the huge amount of money needed to make their per-pupil expenditure equal that of the state’s richest suburban districts. In fact, the court reasoned, the 31 so-called Abbott districts should receive more than the rich districts, because inner-city kids have “specific requirements for supplemental educational and educationally-related programs and services that are unique to those students, not required in wealthier districts, and that represent an educational cost.” Before long, the court had included in these extra programs all-day kindergarten, half-day preschools for three- and four-year-olds (though the state constitution calls for free education to start at age five), and special transition programs to work or to college, plus a ton of money to improve “crumbling and obsolescent schools,” since “we cannot expect disadvantaged children to achieve when they are relegated to buildings that are unsafe”—and that, as Jonathan Kozol would say, contemptuously proclaim that a racist society doesn’t value the kids it dumps there.

Perhaps not averse to shoveling lots more money to unionized teachers and construction workers while claiming to have no other choice, the legislature didn’t resist the court’s encroachment on its constitutional prerogative to set taxes and spending priorities, and it obediently began to fleece the Garden State’s taxpayers with abandon, pushing New Jersey’s state and local tax burden to 12.2 percent of the average taxpayer’s income, the highest in the nation in the Tax Foundation’s latest ranking. As spending on the Abbott districts skyrocketed from 8.9 percent of the state budget in 1985 to 15.5 percent of a much bigger budget last year, suburban taxpayers found themselves paying for two school systems: their own, through property taxes (higher since the suburbs now get much less state aid); and the Abbott schools, through their state income taxes—to the tune of almost $37 billion in the decade from 1998 to 2008, according to a Federalist Society study. Suburbanites with kids in private or parochial school shoulder a third system as well. To fund construction of gleaming new inner-city schools, the legislature authorized $8.6 billion in bonds that pirouetted around constitutionally mandated voter approval—and that covered only half the ultimate cost, given the inefficiency and corruption that riddles the contracting process. And last spring, the court demanded yet another half-billion dollars for the Abbott archipelago, at a time when the sagging national economy makes curbing out-of-control government spending, and separating essential from frivolous efforts, more than usually urgent.

What are New Jersey taxpayers accomplishing with the $22,000 to $27,000 they spend per pupil each year in the big inner-city districts? On test scores and graduation rates in Newark, the needle has scarcely flickered. As the E3 education-reform group’s report Money for Nothing notes, high schools in the state’s biggest city can’t produce substantial numbers of juniors and seniors who can pass tests of eighth-grade knowledge and skills, and the report quotes testimony to the same effect before the state legislature about Camden’s schools.

A remark the Jersey justices made in one of their Abbott decisions suggests why. “Approximately twenty security guards are required to ensure the safety of high school students in Trenton,” the judges say, compared with three or fewer in a suburban school. What kind of school culture does this statement imply? The judges know that “many poor children start school with an approximately two-year disadvantage compared to many suburban youngsters”—because, even with court-mandated preschool, they have vocabularies a fraction the size of middle-class children’s, and they lack a middle-class-level mastery of cognitive concepts like cause and effect, or social skills like sharing, taking turns, sitting still, and paying attention, or a middle-class knowledge base of everything from dinosaurs and donkeys to Rapunzel and Rumpelstiltskin.

And money for a 20-man troop of guards is supposed to help shrink that disadvantage rather than expand it, as the schools do now? To work that rescue, the schools need a vast reformation in their institutional culture so that, as in much less costly parochial schools that succeed with the same youngsters whom the public schools fail, kids behave not because they have a phalanx of guards coldly eyeing them but because they identify internally with the purposes of the school and genuinely want to meet its standards. They need teachers rewarded for merit, not longevity, and a curriculum that stresses skills, knowledge, and striving, not grievance and unearned self-esteem. They need a school culture that expands their sense of opportunity and possibility strongly enough to counteract the culture of militant ignorance and failure that surrounds them in the narrow world they know.

Laudable ends generally don’t justify improper means; but when illegitimate means come nowhere near achieving their indisputably noble goal—when, to paraphrase Chief Justice Jay, government drowns our liberties in a pond that can’t even turn a mill wheel—what justification can there be?

One of the greatest dramas of President Washington’s first term was the showdown between House of Representatives leader James Madison and Treasury secretary Alexander Hamilton over how to interpret the Constitution of which Madison was the moving spirit, and which he and Hamilton had defended and explicated together in The Federalist. Hamilton wanted the government to charter a national bank; Madison argued that doing so would be unconstitutional because chartering a bank was not one of the limited and enumerated powers given to the federal government. It was no good, he said, for Hamilton to claim that the Constitution’s clause empowering Congress to make any law “necessary and proper” for carrying out its enumerated powers would permit it to charter the bank, since a bank wasn’t “necessary” but merely “convenient.” Once you start saying that the Constitution’s “necessary and proper” clause, or commerce clause, or clause to provide for the general welfare gives Congress implied powers, you are setting off on a course that will in the end “pervert the limited government of the Union, into a government of unlimited discretion, contrary to the will and subversive of the authority of the people.”

Nonsense, replied Hamilton: the “criterion of what is constitutional . . . is the end to which the measure relates as a mean. If the end be clearly comprehended within any of the specified powers, & if the measure have an obvious relation to that end, and is not forbidden by any particular provision of the constitution—it may safely be deemed to come within the compass of the national authority.” Congress and President Washington agreed; the bank, once established, sparked an era of golden prosperity; and even Madison learned when he became president that a central bank was indeed necessary, and that interpreting the Constitution requires “a reasonable medium” between trying to “squeeze it to death” and “stretch it to death.” Men of goodwill can disagree on where the line is that would “convert a limited into an unlimited Govt,” but all agree that one can’t overstep that line.

So it was with a certain astonishment that one heard then–Speaker of the House Nancy Pelosi’s reply, when asked two years ago whether President Obama’s health-care plan, which she and her colleagues had just passed into law, was constitutional. “Are you serious?” she said with incredulous contempt. “Are you serious?” With apparently no idea of where her authority came from, she seemed to assume that Congress had power to do whatever it wanted, though her office later announced that the power to force citizens to buy health insurance was implicit in the Constitution’s commerce clause. Congress has, of course, grotesquely stretched the doctrine of implied powers many times since Madison conceded such a thing existed, but here, almost unthinkingly, it stretched it to the breaking point and left the Constitution in fragments on the legislative floor. A year later, federal judges in Florida and Virginia declared the requirement to buy health insurance unconstitutional, as did a Pennsylvania judge this September: the commerce clause, they held, can’t be stretched to make people buy something. If it could, wrote Florida federal judge Roger Vinson, “Congress could require that everyone above a certain income threshold buy a General Motors automobile—now partially government-owned—because those who do not . . . are adversely impacting commerce and a taxpayer-subsidized business.” Now that one federal appellate court has backed Judge Vinson and two others have upheld the requirement to buy health insurance, it will be for the Supreme Court, which received two appeals in the case in late September, to declare whether this time Madison’s nightmare of “unlimited” government finally becomes real.

Nor is this Obamacare’s sole constitutional outrage. To rein in Medicare spending, Obamacare has authorized an appointed panel of 15 “experts,” the Independent Payment Advisory Board, whose power, said Obama’s ex-OMB director, Peter Orszag, will represent “the largest yielding of sovereignty from the Congress since the creation of the Federal Reserve.” To control costs, the board will set reimbursement rates for doctors—which in effect will ration care for Medicare beneficiaries, though the Orwellian law simultaneously forbids explicit rationing—and Congress can overturn the board’s edicts only if it legislates another way to cut Medicare by the same amount. Under some circumstances, which the murkily ambiguous law sets forth in a confusingly vague and broad way, even that congressional tinkering could require 60 votes in the Senate. Nor can Congress kill the board (which, unlike other such agencies as the FCC or SEC, needn’t be even nominally bipartisan) unless it introduces a resolution in January 2017 and enacts it by mid-August by a three-fifths supermajority of all members in both houses—and even then, the resolution can’t take effect until 2020. The Obamacare law isn’t embarrassed to call the executive-branch board’s edicts “legislation,” and it exempts them from judicial or administrative review. So much for the separation of powers.

There’s indeed a lot of petty tyranny going around. The question is, at what point do many little tyrannies add up to Tyranny? Likely voters suggested a troubling answer in an August Rasmussen poll: 69 percent of them said they didn’t think today’s U.S. government enjoys the consent of the governed. And in September, 49 percent of respondents, an unprecedented high, told Gallup pollsters that “the federal government poses an immediate threat to the rights and freedoms of ordinary citizens.”

(Myron Magnet, City Journal’s editor-at-large and its editor from 1994 through 2006, is a recipient of the National Humanities Medal and the author of The Dream and the Nightmare: The Sixties’ Legacy to the Underclass.  This story was first posted on City Journal.)

Huge $13 Billion California Deficit Forecasted: Legislative Analyst

Once again the Legislative Analyst has pulled back the curtain on California’s budgeting practices, announcing last week that the state is likely to have a $3 billion deficit at the end of this fiscal year. This means we can expect significant mid-year cuts to education and social services programs under the budget “trigger” mechanism. That trigger automatically cuts various programs if revenue targets are not met.

The next fiscal year that begins on July 1, 2012 looks no better. The LAO forecast shows a gap between revenues and expenditures of about $10 billion, which brings the total imbalance for this year and next to $13 billion.

One of the benefits of the Legislative Analyst’s forecast is that it focuses our attention on program requirements and revenues over the next five years.  Even though our current budgeting process looks only at one fiscal year at a time, it is important to extend our horizon and view the state’s fiscal condition from the prospective of our current budget priorities and the tax system that supports those priorities.

This is the tenth year of forecasted operating deficits. An operating deficit reflects our inability to match tax revenue with spending priorities. Every budget passed during this time has failed to significantly reduce the operating deficit. Instead, lawmakers have made a habit of spending more than the tax dollars available, and opted to close the expenditure-revenue gap by borrowing money or using one-time changes and accounting gimmicks.

Sadly, little progress has been made in the last 10 years to heed the warning of the Legislative Analyst and take sufficient steps to actually close the gap.

The most recent forecast does show moderate revenue growth through 2016-17 and assumes a slow but steady growing economy. But, the structural deficit remains six-to-eight-percent of state spending.

In 2001, fiscal pundits declared the situation of operating deficits unsustainable. Ten years later we’re saying the same thing. But, no action has been taken to address this continuing declaration.

Maybe it is time to set up a budgeting process that requires policy makers to face the inevitable: require the development and adoption of multi-year budgeting system, require expenditures and revenues to meet, and focus on improving state programs and setting goals, so they can achieve results.

Happy Anniversary.

(Fred Silva is a Senior Fiscal Policy Advisor with California Forward. This article was first posted on Fox & Hounds.)

Why Wall Street Secretly Loves Occupy Wall Street

Wall Street will never admit it.  But the bankers of lower Manhattan loved, loved, loved Occupy Wall Street.

That’s because OWS got the whole financial mess completely wrong, failing to understand the real cause of our economic woes.

OWS swung and missed, and Wall Street rejoiced.

Here’s why:

The target of OWS was corporate greed, a vague catchall embraceable by everyone on the left and everyone feeling left out of the modern economy.

Occupy-ers may have done a great job of organizing drum circles, yoga classes, and general assemblies, but they failed in two important areas.

The first was understanding what went wrong in the American economy and who was really to blame for it.

The second was to provide media training for its spokespeople, who sounded, well, flaky.  Wacky.  Well-meaning, but nuts.

Here’s what the Occupy-ers misunderstood:  corporations didn’t tank the economy.  Investment bankers were the guilty parties, but not one was punished or even confronted with the evidence of wrongdoing.  Not one went to jail.  Not one even went to trial.

The OWS’ers were within shouting distance of the people who vaporized billions of dollars of wealth and tens of millions of jobs.  But they never got their facts straight.  They huffed and they puffed, but they blew Econ 101.

Here’s what they missed:  the purpose of investment banks is to allocate capital. To decide which enterprises should get funded and which should not.  And instead of doing their job properly, they instead loaned money to all kinds of people who could never, or would never, pay it back, from the working poor of Santa Ana to the filthy rich of Italy and Greece.

The bankers basically gave credit cards to people who could never repay what they charged, and earned fat fees for doing so.  As a result, families were foreclosed upon when they couldn’t pay, and the economies of Italy, Greece, Ireland, Spain, Portugal, possibly even France, and even the United States of America were saddled with debt that would take lifetimes to pay off.

The bankers drowned the world in debt.  And their actions were lucrative, shortsighted, selfish, and, for the most part, utterly legal.

The corporations aren’t the culprits; in many ways, they’re victims of the bankers every bit as much as the Occupy-ers.  It’s tough to sell a house, or a cellphone, or even a bag of groceries, to someone whose job, or entire industry, has vanished.

The borrowers were just as guilty as the lenders — whether they were running European nations or running a lathe in Temecula.  But somebody had to dangle dollars at all those risky borrowers.  And those somebodies were the very Wall Street bankers who quietly walked by the Occupy’ers, eyes downcast, on their way to work.

If OWS had only understood that their real beef was with the greed of the bankers, not the corporations, and had they found even a single spokesperson with the slightest ability to complete an English sentence, they might have been more than what they became:  a Wikipedia entry; a Woodstock-like experience for under-employed young people; a sideshow.

Incidentally, exactly which corporations were they so angry at?

Apple, Google, and Nokia, which made their communications flawlessly dependable?

Land’s End, L.L. Bean, and REI, which made their tents, sleeping bags, and warm clothes?

Whole Foods, Walmart, and Target, where they bought the wide variety of wholesome and delicious food they ate?

The news media that so vigorously covered OWS, hanging on their every pronouncement, seeking to turn every Erica from Brooklyn and Tony from Hoboken into reincarnations of Gandhi and Martin Luther King?

How ludicrous to stand before a TV news camera wearing Nikes, Levis, and Gap sweatshirts and condemning the very corporations that made those garments.

No, OWS completely missed the point.  They deserve credit for intuiting, in a broad, amorphous sense, that the economic disaster befalling the West had a Ground Zero in Lower Manhattan.  But they didn’t take a moment or two to figure out exactly who the bad guys were.

And today, post-OWS, those bad guys, the investment bankers who pocketed millions for lending out unrecoverable billions, are laughing at OWS…laughing all the way to the bank.

(Michael Levin is a New York Times bestselling author and runs www.BusinessGhost.com, America’s leading provider of ghostwritten business books.)

Clashing Tax Proposals

California’s taxpayers look on in bewilderment as more and more tax increase proposals are created for next year’s ballot. A whole lot of organizations and people think they have the solution to California’s problems with an increase in taxes. And they all want to bring them to the ballot.

Over the weekend, the Sacramento Bee revealed the proposals from the Think Long Committee funded by billionaire Nicolas Berggruen. As noted in one of my previous posts, the centerpiece of this proposal is a tax on services. The proposal also carries plans to cut income and corporation tax rates, drop the sales tax on goods a half-cent and raise business taxes on out-of-state firms, among other proposals.

The sales tax cut goes against the plan being tested by the California Teachers Association, which would raise the sales tax along with income taxes on certain high-end taxpayers.

Then there are other tax plans in the works primarily aimed at funding education. As I reported last week, civil rights attorney and investor, Molly Munger, has a proposal to increase income taxes. A coalition of some business and education groups including the Bay Area Council, Children Now and the California School Administrators Association are reportedly behind a strategy that would include broad-based tax increases along with plans to make it easier to raise parcel property taxes on the local level.

Already filed with the Attorney General’s office is an initiative to create an oil severance tax to fund both K-12 and higher education.

It doesn’t take a degree in political science to realize that if all these tax measures appear on the ballot, they would be self-defeating, scaring the taxpayers to pull the NO lever and be done with it.

The Big Kahuna in bringing these disparate plans together is the governor. We know he, too, wants a tax plan on the ballot. Word is he still wants to entice business interests to play along by staying away from business-specific taxes and advocating for broad based taxes like the sales tax and an income tax increase on upper income earners. Unlike the education interests who would be satisfied with directing all new revenue to schools, Governor Brown wants money to fund his government realignment plans.

One definition for Kahuna is “priest, sorcerer, magician, wizard, minister.” The governor, a former seminary student, would have to be all these things to get the different tax plan opponents to pull together.

While all these tax measures, and perhaps others, will be filed for a title and summary that gives the governor and other interests until sometime in January to try and reach consensus on a tax strategy that won’t send the taxpayers running for the hills.

(Joel Fox is the President of the Small Business Action Committee and Editor of Fox & Hounds, where this article was first published.)