Sunday, May 31, 2009

Poor Tax Starved California

California is sometimes known as the Golden Bear state. One thing about bears is that if you feed them they will keep coming back until you have no food, and then you are the food.

California is asking for a federal guarantee of their debt, because they are cash strapped and don't want to pay the extra money investors are demanding. As they face a 33% shortfall in revenues and expenditures, they have a lot of work to do. But never fear, in their words "California already has cut $15 billion and raised taxes by nearly $13 billion this year. Schwarzenegger has proposed cutting nearly $20 billion more, including eliminating California's welfare-to-work program and getting rid of health insurance for 930,000 poor children."

That's funny. Their payroll keeps rising, so too total spending. The 'cuts' are hypothetical cuts from projections, sort of like when my wife saves us $50 by buying a pair of shoes yet foresaking a nicer pair.

Paul Krugman sees the problem as a lack of taxes:
The seeds of California's current crisis were planted more than 30 years ago, when voters overwhelmingly passed Proposition 13, a ballot measure that placed the state's budget in a straitjacket.

Even more important, however, Proposition 13 made it extremely hard to raise taxes, even in emergencies: no state tax rate may be increased without a two-thirds majority in both houses of the State Legislature.

A theory clearly 'too good to check'. State spending in the past two decades, as this Reason Foundation report spells out, has increased 5.37 percent a year (and nearly 7 percent for the past decade), compared to a population-plus-inflation growth rate of 4.38 percent. If the budget growth rate had been limited to the population-inflation growth rate, the state would be sitting on a $15 billion surplus right now. The California tax burden is not unambiguous because it comes from a variety of sources, making it multidimensional, but on almost all measures it is among the highest of the 50 states, in contrast to the theory proposed by Krugman.

Just as the investment frauds are not revealed in good times, bad governments are not exposed until recessions. And so too Nobel-prize winning economists.


Matthew Gunn said...

Just to note, this graph does not reflect the 50% increase in pension benefits Gray Davis and the democrats passed for public safety employees such as prison guards. (Going from 2% at 50 plan to 3% at 50). After 30 years of service, they can retire at 50 years old with 90% of their final salary as a pension, for life.

Davis and the dems signed/passed a number of other long term contracts that later came home to roost.

Matthew Gunn said...

The simple story is that back in the 90s, the tech bubble caused a surge in state revenues which later collapsed. Ever since then, spending has been unhinged from long term revenues, with the budget only balanced in times of surging revenue growth. The deficits for the past decade have been papered over with gimmicks and debt as the political process has been unable to control spending growth or raise taxes.

Gimmicks: raiding of special funds, borrowing from local government, corporate tax tricks that shift revenue forward
Borrowing: Economic recovery bonds, bonds to finance Davis's purchases of electricity during blackout, etc...
Gimmicky borrowing: pension obligation bonds (borrowing paid by promised future pension reform)

Unknown said...

I read that Krugman article as well and thought the reasoning was absurd. It's like a person who runs up their credit card bills and then blames non-payment on not bringing in enough income to cover the expenditures.

Anonymous said...

this blog has the best animal metaphors. I'm thinking of this entry specifically

Anonymous said...

This reminds me of when our church said we all needed to give more money, because the budget had doubled in the past 5 years but donations had only gone up 50%. (And there was essentially no capital spending in these 5 years.)

Jim Glass said...

According to the Tax Foundation, California's tax revenue as a percentage of state residents' income is tied for second place in the nation with New Jersey, after only New York (where I am lucky enough to reside).

Interestingly, those three same highest-tax states -- New York, New Jersey, and California -- faced $65 billion in budget deficits in 2009 ... more than two-thirds of the total of all the budget gaps faced by all 50 states. Coincidence?

As to Krugman ... it's really a pity the guy has no sense of irony.

When one wants sound advice or analysis and is looking for a source to provide it, the combination "Mentally competent & factually well informed" beats "Genius who doesn't know what he is talking about" every time.

I mean, if you are a first-time tourist in Manhattan looking for Avenue C in Greenwich Village ("Manhattan avenues have letter names?") are you better off asking a cabbie with an IQ of 90 or a fellow tourist also in town for the first time for a quantum physicists convention?

Krugman, Stiglitz, Simon Johnson, "brilliant" name guys like this, are proving this all the time with the factual howlers they make about the banking crisis, etc. But how much actual factual knowledge and experience do these geniuses have in actual banking -- or for that matter in any lowly real-world business? Right now, Johnson's blogging partner is asking for help in figuring out how SUVs possibly can be more profitable for Detroit than the micro-cars Obama wants it to produce -- after all, and I quote: "Textbook micro tells you that price equals marginal cost..." so on every size car profit should the be the same by principle. How can it not be so? "Genius" at work! (But they have no hesitancy there in telling us we should be nationalizing the banking system on a mass scale.)

The particular thing about Krugman is that back in his Slate days and earlier he was the very first to tear a new hole in any "expert" from any other field who dared poke his nose into econ. So there is an especially delicious double standard in his now being such a righteous pontificator on every subject in the world. (As he enjoys indulging so many double standards.)

Perhaps my favorite Krugman quote ever, from Slate:

"I do not think of myself as an all-purpose pundit. I remember once (during the air phase of the Gulf War) seeing John Kenneth Galbraith making pronouncements on TV about the military situation, and telling friends that if I ever start pontificating in public about a technical subject I don't understand, they should gag me."

If only he had a sense of irony, he could really enjoy his own columns. ;-)