California Tax Increases Have Consequences

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This piece was originally published by Fox and Hounds Daily

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