Tag Archive for: California state budget

Looming Deficits Present Opportunity to Find Solutions for California

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Less than six months ago, California’s state legislature approved a record breaking $300 billion state budget. Within that total, and to finance most of the state’s ongoing operations, was a general fund allocation of $235 billion for the fiscal year ending June 30, 2023.

Record breaking budgets are nothing new. Only ten years ago, California’s general fund was $93 billion, which adjusted for inflation would be $118 billion in today’s dollars. Meanwhile, California’s population over the past ten years has only grown from 38 million to 39 million. This means that inflation adjusted per capita general fund spending in California has increased from $3,124 back in 2013, to $6,023 today. California’s state government is spending twice as much money today per resident as it did just ten years ago.

This explosion in spending has yielded dubious benefits. By nearly every measure, things are worse off today in California. Obvious examples include expensive and unreliable energy and water, failing schools, rising crime, unaffordable housing and college tuition, and an exploding homeless population, but that’s hardly the entirety of the worsening challenges facing Californians. The decade-long run of record tax revenue spawned an avalanche of new regulations, driving up prices, discouraging expansion of big business and driving small businesses under. Through its spending priorities California attracts the dependent and repels anyone striving for independence. It’s grotesquely inequitable.

This is the context in which to view the latest revenue projections coming from the nonpartisan Office of Legislative Analyst. The concern here should not be that our state budget for 2023-24 now faces a potential $24 billion deficit. The concern should focus on why there has been an explosion of state spending, yielding nothing but growing dysfunction.

As it is, LAO’s projection of a $24 billion deficit is a baseline case, relying on several assumptions that could go sideways, tumbling the actual deficit into much more troubling territory. For example, LAO acknowledges the likelihood of a deepening economic recession, but does not factor the impact of a recession into their tax revenue estimate. They write, “Were a recession to occur soon, revenue declines in the budget window very likely would be more severe than our outlook.” In the section of their analysis where LAO projects worst case scenarios, they project general fund revenue dropping as low as $180 billion in 2024-25, which based on merely maintaining the current general fund budget reflects a deficit of $55 billion.

If the events of the past three years have taught us anything, it’s that consequences of pivotal events are often only obvious in hindsight. In June of 2020, did anyone really think that COVID shutting down half the economy would lead to a boom in tech company valuations? Did anyone at that time realize how uniquely beneficial the tech stock boom would be to California’s state general fund tax revenue? It’s easy today to look back and recognize the chain of causes, but it wasn’t easy to predict them when the COVID ordeal first began. It’s also easy, and probably accurate, to say that over this time period, the state legislature’s blithe ambition to make sure spending kept pace with revenue growth was blissfully unaware of just how improbable and fleeting the gift was that they were squandering.

Another lesson from the past three years, however, is to be wary of excessive pessimism. Unsustainable economic models work until they don’t work, and as long as the US Dollar is the least afflicted currency in the world and the US is the most secure investment haven in the world, and as long as inflation continues to reliably erode the principal value of a nominally exploding federal debt, massive deficit spending to stimulate economic activity may remain a viable strategy. If only more of that spending would be invested in practical infrastructure. Nonetheless, this could go on for decades. It could take forms we can only imagine. We simply don’t know.

The question therefore isn’t how to cut spending and raise taxes in order to balance the budget. The likely truth is that California’s state legislature is going to muddle through one way or another. The prevailing question should be how does California’s state legislature start to do the right thing instead of the wrong thing with all that money? They’ve doubled per capita spending in the last ten years, and ordinary hard working Californians can’t afford to live here any more. Clearly, so far they’re doing everything wrong.

LAO warnings of an impending general fund deficit are a good time to not only talk about how California’s state legislature is on the wrong course, but exactly how it can change its course. If you want to realign the state’s politics, it isn’t enough to say taxes, crime, and prices for everything are too high, and educational achievement and the supply of housing are too low. Propose concrete solutions. Very few Californians would mind paying their taxes if the state was affordable and effectively addressing the challenges of crime, homelessness, education, housing, water, transportation, energy, and education.

Solutions exist, but lack politicians with the courage to promote them and the charisma to effectively convince voters of their efficacy.

Offer state vouchers to parents to use to send their children to any accredited school, public or private.

Rescue public education by replacing woke curricula with classical education would save billions and rescue a generation from a failing system.

Fast track approval of nuclear power plants, natural gas fracking, and refinery expansions to force competition for energy and lower the prices for fuel and electricity.

Fund more water supply projects and practical freeway improvements, using tax and bond funds to yield long term economic dividends.

Approve housing developments in weeks instead of decades and reduce California’s absurdly overwritten building codes to lower the cost of housing.

Turn the timber industry loose again to thin California’s dangerously overgrown forests.

Build inexpensive minimum security facilities to incarcerate drug addicts and petty thieves to curb crime and end unsheltered homelessness. Use these facilities to teach inmates vocational skills so upon release they can fill hundreds of thousands of high paying construction jobs.

New solutions. An entire new alternative vision. This is the real discussion that California needs. Not just how to balance the budget. Rather, how to allocate the budget, and how to deregulate the economy. Where are politicians who are ready to step up with more than criticism of the failures of California’s one-party state, and offer solutions?

This article originally appeared in the California Globe.

Inflation adjusted per capita state spending doubles in one decade – for what?

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The California State Legislature has just released the “Floor Report of the 2022-2023 Budget,” and it’s a doozy. Representing an agreement between the budget committees of the Assembly and the Senate, and building on Governor Newsom’s proposal, this $300 billion monstrosity has moved one step closer to becoming final.

To fully appreciate how out of control California’s state government spending has become, compare the general fund spending growth over just the past ten years. The following chart, relying on official state budget reports going back to 2012-13, shows California’s General Fund spending by year. Back then, the general fund was $92.9 billion. Adjusting for inflation and expressing this amount in 2022 dollars, the 2012-13 general fund was $118.4 billion, barely half the swollen $235.5 billion that is projected for the upcoming budget year.

When you take into account the fact that California’s population has only increased by 3.1 percent in the past decade (it’s actually declined for the past two years), this budget profligacy becomes even more inexplicable. The inflation adjusted (i.e., in 2022 dollars) per capita general fund spending ten years ago was $3,124. It has now exploded to $6,023 per person. What has the average Californian gotten for all that extra money, apart from taxes that are higher than ever, and set to go even higher?

By almost every objective measure, Californians are worse off today than ten years ago. Back in June 2012, the average cost of a home in California was an already outrageous $307,000 ($391,000 in 2022 dollars). As of June 2022, the average cost of a home in California is just over $800,000.

Every basic necessity in California costs more: gasoline, electricity, and water. The only commodity where Californians still pay prices competitive with the rest of the U.S. is for fruit and vegetables, but regulators are fast closing in on that last advantage. Just ask a farmer that’s trying to get water allocations from a state bureaucracy committed to letting every precious drop of rain in these dry years run out to sea. And they’re doing this during a global food crisis.

What about crime? Homelessness? Is California better off today than it was ten years ago? Drive down any urban boulevard, or up any freeway onramp, and survey the expanse of tents and makeshift shacks. Did you see that ten years ago? The state’s answer? Turn tens of billions of dollars over to developers and “nonprofits” to build “permanent supportive housing” at an average cost of $500,000 per unit. These unfortunate souls could easily be rounded up and given inexpensive shelter, and required to maintain sobriety, and if that happened they’d either go back to Arkansas, or they’d finally have a chance to recover their dignity. Instead, while the homeless industrial complex scams taxpayers for additional billions, they frequent “safe injection sites” while living in squalor.

What’s happened in California, and it’s being exported to the rest of the United States, is an out-of-control public sector has imposed a regulatory burden on businesses that has driven prices up, destroying small businesses, and enabling big corporations to consolidate markets.

Excessive building codes and permitting fees are a perfect example. Builders in California are required to comply with so many mandated construction codes, and obtain so many permits, from so many agencies, that only the biggest and most politically connected development corporations can still make money. Smaller operators are driven out of the business, not only including the smaller construction companies, but mom and pop landlords. As these barriers fall into place, entire neighborhoods are bought up by investment funds. Thanks to the crippling burden of regulations, the last avenue towards building generational wealth in California, real estate, has been taken away from all but the wealthiest families.

This is the story of California in the early 21st century. A voracious state government has created shortages and high prices through overregulation, then as people are impoverished by its actions, it has used that to justify expensive new programs and expanded state bureaucracies. Failed policies, for California’s state government, constitutes success, as taxes are raised and even more regulations are enacted to cope with the problems it created.

No wonder the inflation adjusted per capita state General Fund spending has doubled in the past decade.

This article originally appeared on the website of the California Policy Center.

California’s General Fund Relies on Bailouts and Billionaires

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One of the biggest reasons California’s technology moguls supported the Biden/Harris candidacy had nothing to do with ideology. It had to do with their pocketbooks. Because with a Californian presiding over the Senate, and a Californian Speaker of the House, expect federal bailouts to flow west by the hundreds of billions.

The likelihood of federal money to prop up failing local governments, state agencies, and public employee pension funds has just gone from remote to probable, as Democrats take control of all three branches of the federal government later this month. Simultaneously, and as a result of this political outcome, the likelihood of massive new state taxes here in California targeting the super rich drops from probable to too-close-to-call.

Consider the impact of Assembly Bill 2088, if enacted, on California’s wealthiest households. This “wealth tax” will impose, year after year, an annual tax at a rate of 0.4 percent of any California resident’s worldwide net worth in excess of $30 million.

To use the example of California’s richest man, Elon Musk, who according to Forbes had a net worth in early January of $176 billion, AB 2088 would require Musk to pony up 704 million, every year, for the privilege of living in California. Mark Zuckerberg, with a current estimated net worth of $92 billion, would have to pay the state $368 million. Every year.

It is easy enough to understand the emotional indifference that a libertarian might display towards Musk getting soaked for $704 million per year, or that a conservative might display towards Zuckerberg having to turn over $368 million per year, or that liberals arguably feel towards anyone wealthy being forced to pay their “fair share.” But California’s rich already pay a huge share of California’s total state tax revenues.

For example, the Governor’s Budget for 2019-2020 projected 69 percent of all general fund revenue to come from personal income taxes. Another 20 percent came from sales taxes and 9 percent from corporation taxes. The other 3 percent came from a variety of sources, mostly insurance tax. While property tax is a significant source of revenue, it is a local revenue source and only impacts the state budget insofar as when property taxes go up, it relieves pressure on the state to allocate more out of the general fund to support local schools and other local agencies.

Bearing in mind that nearly seven out of every ten dollars going into California’s general fund comes from personal income taxes, the following chart shows who is paying those taxes. Using Franchise Tax Board data from 2018, and sorted by the reported taxable income of the 16.8 million Californians filing returns, it is immediately apparent that nearly everyone paying taxes made under $100,000. That is, 13.2 million Californians, or 78 percent of the people filing state income tax returns, contributed only $7.8 billion or 9 percent of the total personal income taxes collected.

On the other side of this chart, to the right, the flipside of this top-heavy equation is presented. There were 89,000 Californians in 2018 that reported taxable income of over $1.0 million. At one-half of one percent of the total filers, their numbers don’t even register on the chart. But the orange column, representing the $34.5 billion they paid in taxes, dwarfs the contributions from the other brackets. One-half of one percent of California’s taxpayers paid 40 percent of all personal income taxes.

Moving one notch to the left to incorporate the filers who reported taxable income in excess of $500,000 in 2018 yields further evidence of just how top-heavy California’s reliance is on the wealthy to fund state government operations: Only 275,000 individuals, representing 1.6 percent of tax filers, paid 56 percent of all personal income tax revenue, which in turn is 40 percent of ALL general fund revenue in the State of California.

It is easy enough to scoff at the prospect of extremely wealthy people having to pay more. But one way or another, California’s state government needs more money. Governor Newsom’s proposed 2021-2022 state budget proposes record spending. He does this in the face of structural deficits that existed before COVID-19 trashed California’s economy. The pandemic drove the global economy online, disproportionately helping California’s tech industry, but how much higher can tech stocks soar, and how much more will the tech billionaires pay?

In addition to a wealth tax, still under consideration in the state legislature is Assembly Bill 1253, which would impose “three new surcharges on the state’s highest earners: 1% for taxable incomes over $1 million, 3% for incomes over $2 million and 3.5% for incomes over $5 million, meaning California’s wealthiest could pay 16.8% on their taxable income.” The tax is expected to generate over $7 billion per year.

Of the two bills, AB 1253 is more likely, since it would not require the gyrations that a precedent setting wealth tax would require. But would California’s wealthy residents leave the state? The litany of reasons California is driving away residents and businesses is long and compelling, with high taxes having an impact along with exhausting, endless regulations, a punitive cost-of-living, and a passive-aggressive bureaucracy.

Back in the 1950s and 1960s, Californians paid relatively high taxes (for the time), but got plenty for their money. Californians saw their taxes used to build a massive, statewide system of water storage and distribution, beautiful freeways to tie together the growing cities, and the finest public university in the world.

Today Californians live in a state of 40 million people with an infrastructure designed for 20 million people. New infrastructure projects are rarely approved, and when they are, more money is spent on litigation and bureaucracy than on actual construction. Thanks to preposterously overwritten regulations, California’s homebuilders cannot profitably build affordable homes without collecting government subsidies. California’s timber industry could thin the forests and would pay taxes on their earnings, but because they have been regulated nearly into oblivion, California’s forests burn like hell, year after year. One could go on.

Perhaps California’s weather and scenery will keep the super rich around. Perhaps California’s generous social benefits and decriminalization of petty theft and public intoxication will guarantee a growing population of indigent. But the middle class and the small businesses are leaving. That’s a problem for everyone, including those who can afford to stay.

While the wealthy contribute 40 percent of all tax revenues to the state’s general fund, it is the middle class and small businesses that pay most of the other 60 percent. With every moving van that heads east, more of that burden transfers to the wealthy. They had better hope their gambit has paid off, and their new friends in Washington DC are generous indeed.

This article originally appeared in the California Globe.

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How to Reduce the California State Budget by $40 Billion

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As of a few days ago, high-wage earners have a new reason to leave California: their state income taxes are no longer deductible on their federal income tax returns.

Can California’s union-controlled state legislature adapt? Can they lower the top marginal tax rates to keep wealthy people from leaving California?

The short answer is, no, they cannot. They cannot conceive of the possibility that California’s current economic success is not because of their confiscatory policies, but in spite of them.

Earlier this year California’s union controlled legislature approved a gas tax increase that will increase state tax revenue by about $5.0 billion per year. Next in their sights is changing property taxes to a “split roll” system, whereby all commercial properties will no longer be protected from steep tax rate increases. Also under consideration is extending sales taxes to services, along with taxes on water, marijuana, and, who knows, maybe even robots.

These new taxes have attracted a lot of attention, but in reality California’s state government derives most of its tax revenue, 58%, from personal income tax. In recent years personal income taxes have contributed as much as 65% of the California state government’s total tax revenue. California’s top marginal income tax rate of 13.3% is by far the highest in the U.S. Oregon has the 2nd highest rate, at a much lower 9.9%. The impact of this can be seen on the chart depicted below, which is taken from the State Controller’s most recent annual financial reportfor the fiscal year ended June 30, 2016. As can be seen, state income taxes accounted for 58% of all tax revenue in the most recent fiscal year for which we have data. Nothing else even came close.

California Tax Revenue By Source – 2015 and 2016

When around 60% (or more) of all state tax collections depend on how much money individual residents make each year, revenue can be volatile. A recent analysis by the Franchise Tax Board, as reported in the Sacramento Bee, showed that the top 1% of California taxpayers by income paid 45% of the total income taxes collected. This means that in the last fiscal year, the top 1% paid 26% of ALL taxes collected in the State of California. If you extend that comparison to the top fifth – those Californians who earned on average over $237K in 2013, it can be seen they paid nearly 90% of the total income taxes collected, or 51% of ALL taxes from all sources.

California Income Tax Burden by Income Group – 2013 vs 1994

When you have the top fifth of your wage earners paying more than half of ALL taxes collected in your state, you definitely don’t want those folks moving to other states. California has really great weather, but there are a lot of reasons to leave: An inhospitable business climate, a global economy with burgeoning new opportunities in many low tax regions, and an increasingly virtual work environment which means you don’t have to live within 50 miles of the California coast in order to attract venture capital or find business partners.

Just for the sake of argument, here are ways to cut expenses in the state budget, in order to keep California’s state government solvent without punishing the wealthy, or, worse, losing them to other states and nations.

HOW TO REDUCE THE CALIFORNIA STATE BUDGET BY $40+ BILLION

(1) Reduce Costs for Prisons – $2.0 billion or more:  California now spends over $75,000 per year per prisoner, a cost that has doubled since 2005. In Alabama, it costs less than $15,000 per year per prisoner. If California contracted with the State of Alabama to have them house its 130,000 prisoners, that would save California taxpayers $7.8 billion per year. If doing business with Alabama is unpalatable, how about right across the border in Nevada? The State of Nevada spends under $18,000 per year to house their prisoners – sending California’s prisoners across the Sierras to Nevada could save taxpayers $7.4 billion. Obviously relocating California’s prisoners to other states is an extreme solution. But there are many other less extreme, bipartisan solutions to lower prison costs, including alternatives to incarceration.

(2) Cut Ratio of Administrators to Faculty in Public Universities – $2.0 billion or more:  In 2000 California’s UC System employed around 4,000 administrators and 7,000 faculty. Only 15 years later, in 2015, the UC System employed 10,500 administrators and 9,000 faculty. Just assuming for a moment that the administrative overhead in the UC System wasn’t already bloated in 2000, the UC System could reduce their administrative headcount by over 5,000 administrators, and save at least $500 million per year. Do the same thing in California’s much larger Cal State and Community College systems, and you can probably achieve total savings of around $2.0 billion per year

(3) Outsource CalTrans Work and Eliminate Redundant Positions – $2.5 billion or more: CalTrans is set to consume $12.8 billion of the State 2017-18 budget. As recommended by State Senator John Moorlach after an audit of the agency, just eliminating 3,500 redundant positions would save $500 million. But competitive outsourcing of roadwork contracts could save much more. CalTrans only outsources 10% of its roadwork, whereas, for example, Arizona outsources 80% of their roadwork. It is common to take competitive bids from private contractors to do public road maintenance and upgrades – CalTrans is the exception. A very expensive exception.

(4) Fund all CalTrans Work With Proceeds from Bullet Train Financing – another $10 billion per year for ten years: Ok, this isn’t entirely fair. Bonds are deferred taxes. But just imagine if instead of paying for a train that will never make any meaningful contribution whatsoever to relieving the congestion on California’s roads and freeways, all that money was used to improve the roads? Redirecting Bullet Train funds – which are destined to total well in excess of $100 billion – into CalTrans projects would save taxpayers nearly 100% of CalTrans budget for a decade or more.

(5) Slash State Agency Headcount and Pay/Benefits by 20% – $6.5 billion: In 2015 the average pay and benefits for the 154,000 full time employees of state agencies was $116,887. Eliminating 20% of these jobs would save taxpayers $3.6 billion per year. Reducing pay and benefits for the 123,000 remaining state employees by 20% would save another $2.9 billion – their average pay package would “only” be $93,500 per year after this reduction. Is this feasible? Recent history proves that it is. In 2009, cash-strapped California state agencies implemented “Furlough Fridays,” which functionally achieved both objectives described here – there was a 20% reduction in work being performed, and state workers collected 20% less in pay. And guess what? The state government continued to function.

(6) Reform Pensions – $2.1 billion: When you talk about pensions, it is understating the problem to restrict the discussion to state agencies. Local cities, counties and school district pensions combine with state agencies to produce an unfunded liability that – depending on who you ask – ranges between $200 and $700 billion. Moreover, pension reform might be subsumed under the preceding Option #5. Nonetheless, here are the numbers for state agencies: Taxpayers contribute, on average, $21,900 towards each state workers pension, representing 26% of their pay. Just lowering that to a contributory 401K equivalent to 10% of pay would save at least $2.1 billion per year. In reality, because these pensions are so underfunded, getting control of pension benefits would actually save much more than this estimate.

(7) Face Reality and End the “Sanctuary State” – around $20 billion: According to the United Nations, there are now over 250 million displaced refugees in the world. Right behind them are another 1.2 billion individuals living in extreme poverty. America, with only $330 million residents, is not nearly capable of absorbing even a fraction of these multitudes, much less California with not quite 40 million residents. Yet California has thrown open the doors and foots the bill, betting that the tech boom and asset bubble will last forever. A study by the Federation for American Immigration Reform estimated the cost of undocumented immigrants to California taxpayers at over $25 billion per year – $14.4 billion for education, $4.0 billion for health care, $4.4 billion for justice and law enforcement, $0.8 billion for public assistance, and $1.6 billion for general government services. This scrupulously footnoted study, published in Sept. 2017, got virtually no coverage in the media. What did receive extensive media coverage was a study promoted by the Institute on Taxation and Economic Policy that estimated the total state and local taxes paid by California’s illegal immigrants to equal nearly $3.0 billion per year. Net cost and potential savings: $22 billion. At the least, California should stop being a magnet state for undocumented immigrants, and instead should help craft then adhere to a realistic national policy.

The most powerful special interest in California, government unions, wants nothing to change. They are hostile towards corporations and individual wealth. They have strong incentives to want inefficient, expensive prisons, universities, and infrastructure projects. They have strong incentives to expand all government services to accommodate destitute immigrants. Why? Because the more government workers are hired and the more taxpayers’ money is wasted, the more dues paying government union members they acquire.

Joining these government unions are California’s powerful Latino Legislative Caucus and their allies in the identity politics industry, who recognize a huge political opportunity by spewing separatist demagoguery, nurturing a bleak, tribal paranoia in the collective minds of recently arrived immigrants. Also joining these government unions are left-wing oligarchs and the monopolistic businesses they control, who see in an expanded government and a hostile business climate a chance to prosper through legislated scarcity and mandated product choices. And, of course, the asset bubbles produced by contrived shortages add precarious value to the pension funds and increase property taxes.

So these solutions, while eminently practical, may never see the light of day. But California’s voters should understand that around $40 billion could be cut from the state budget if California’s government was ran in the interests of the people, instead of in the interests of government unions and their elitist allies. If $40 billion were cut from California’s state budget, not only could the new gas tax be repealed, but the top marginal tax rate could be dropped to under 10%. And as any student of the Laffer Curve knows, that might actually keep California’s wealthy from leaving; it might even cause income tax revenue to go UP, as fewer high income individuals feel the need to shelter or defer their taxable earnings.

The Laffer Curve
Depending on where you are on the curve, lowering taxes can raise tax revenue.

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