January 2002

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Cal-Tax Commentary 

Larry McCarthy is president of the California Taxpayers’ Association. This commentary was written for and published by The San Diego Union-Tribune in the newspaper’s January 20, 2002 Insight section. For Cal-Tax’s complete package of budget suggestions, visit the Cal-Tax website: www.caltax.org

If mishandled, the state budget imbalance could mean a massive liability for California taxpayers well into the future.  This budget scenario has occurred before and lessons should have been learned to avoid pitfalls of the past.

Taxpayers have relatively simple, common sense requests for good budget outcomes this year and would urge the following of the Legislature and governor:

• Balance spending and revenue, without over-obligating future taxpayers.

• Avoid borrowing, “funny money” gimmicks or taxes that protect wasteful, inefficient and low-priority spending.

• Don’t forget the private-sector economy and jobs. This is a revenue opportunity for state and local government.

• Use the deficit as an opportunity to review and set aside low-priority, inefficient spending that cannot be justified.

Is the proposed 2002-03 budget in balance? Even with borrowing, additional revenues and federal money to cover an estimated $12.5 billion general fund budget gap, the budget may be billions of dollars out of balance. Income tax revenue estimates by the Department of Finance are much higher than those made late last year by the Legislative Analyst’s Office (LAO).  The nonpartisan LAO also indicates that strategies and assumptions in this budget  “raise the risk of substantial future budgetary imbalances emerging” that could leave an operating deficit of as much as $4 billion in 2003-04.

Borrowing and gimmicks. To balance general fund spending, the budget proposes to borrow approximately $5 billion from various funds to help close the gap.

It is a maxim of public finance that government should not engage in long-term borrowing to fund current operations. Long-term borrowing must be reserved for capital facilities with useful lives at least as long as the term of the loan. The reasons are obvious: Future taxpayers cannot afford to pay for current expenses of schools, public safety and other operational costs and debt service to cover deficit spending of an earlier budget.  The proposed deferral of a $1 billion payment for state employee and teacher retirement is an example of such borrowing.  This action is essentially borrowing that will cost taxpayers more than $6 billion over 20 years.

Short-term, cash-flow borrowing can also create problems if it insulates low- priority spending that should be eliminated.

Revenue increases. The governor proposes to extract more than $500 million from taxpayers to balance the budget. Whether these are “taxes” or “fees,” or accelerated revenue collections, a recession is a bad time to be asking taxpayers for more money. Defined as fees by the administration, they include surcharges on court filing fees in civil cases and surcharges on fines for criminal activity; higher fees for the right to build a power plant; more money from those who need environmental cleanup permits, and fines for making late payments to register vehicles.

Anticipating federal dollars. The budget counts on $1 billion in federal funding increases. The budget should not be based on these revenues. Instead, spending should be tied to the availability of these funds, so if the federal funds to not materialize, the expenditures will not occur.

Counting $50 million from the work of new tax auditors is absurd. The auditors cannot be hired, trained, put out on the job and complete most audits in the fiscal year.

What can be done? From taxpayers’ perspective, all of the following:

Employment growth in California is the state’s biggest revenue opportunity.  In the mid-1990s, as the economy rebounded with more people working, government was swamped with tax dollars and surpluses reached record, multibillion-dollar levels year after year. Revenue to public agencies amounts to several thousand dollars for each new job created.

Policy-makers need to monitor closely the costs of doing business in California and work to create a competitive tax structure. Steps in that direction include exempting investment in plant and equipment from the sales tax.  It will also be important for California to conform to federal economic stimulus legislation. The state should conform, for example, to the federal law increasing the amounts that can be invested in individual retirement accounts.

Further, government should create a more hospitable business climate by devoting additional resources to needed transportation, school and housing projects.

Review new programs and lower-priority spending in order to reallocate resources to priority needs of Californians. It is clear that the public expects government to tighten its belt in response to a budget deficit. Raising taxes and fees and using smoke-and-mirror gimmicks will inevitably lead to future budget deficits, as will continued spending on ineffective government programs that are seldom reviewed or modified.

The budget crisis can be an opportunity to improve the state by reducing wasteful, ineffective public spending, investing existing tax dollars in priority programs such as public safety and education, and nurturing the economy back to health with tax incentives that stimulate job growth.

A Field Institute poll in December noted that twice as many Californians prefer reduced spending to raising taxes. Further, 60 percent of those polled believe their tax burden is too high.

Cal-Tax has a list of  $4 billion in spending programs that the governor and the Legislature might consider postponing in the interest of balancing the state budget.   Cal-Tax also offered a $1 billion revenue opportunity through protest regulations at the Franchise Tax Board that would collect taxes already owed.

Too many tax dollars are wasted or subject to questionable spending by state and local governments, and schools. Cal-Tax has compiled newspaper reports of irresponsible fiscal behavior over the past three years that exceed $6 billion.  These lists are available at www.caltax.org/statebudgetproposals.htm

California should encourage, not eliminate, performance contracting.  Bringing competition into the public service delivery systems through performance contracting can produce savings ranging from 10 percent to 40 percent.  The budget proposal would eliminate contracts for community corrections facilities, where private sector companies run correctional facilities at costs that are 30 percent to 40 percent lower than comparable facilities managed by the state of California.  This state should be doing more performance contracting, not less.

Performance contracting is a key strategy in providing highest quality public service at competitive costs.  It is important to note that contracts at correctional institutions can have effective, results-driven inmate education and training programs exceeding those programs in state-run institutions.

Beware of the “spending lobby.” Special interest spending advocates resist belt- tightening steps that are a reality for everyone else in responding to an economic downturn. The largest, best-financed group of lobbyists in Sacramento can be described as the spending lobby -- advocates and lobbying organizations hired by cities, counties, schools, other local agencies, public employee unions, and those who receive funding from state and local government. The job of the spending lobby is to protect the current spending base.

Lower-priority government programs cannot be immune from review.

Avoid new taxes and fees. Higher taxes will further destabilize the economy and hamper recovery. Punitive taxes, fees and other exactions, imposed on isolated sectors of the economy, have had embarrassing results and damaged the state’s reputation.

As I noted at the beginning, we’ve been there before. For example, in the early 1990s, the state imposed $300 smog impact fees to register a motor vehicle purchased in another state, a tax that was ruled unconstitutional. This has required a $500 million refund program with adverse and costly side effects.

Another early 1990s budget-balancing ploy applied the sales tax to snack foods, touching off a consumer backlash until it was rescinded.

Also, in that budget response was a personal income tax increase that produced virtually none of the expected revenue. Another example: A maritime bunker fuel tax drove suppliers – and jobs – out of California, until the Legislature and governor rescinded the levy.

It is as true today as it was yesterday: Increasing taxes during an economic downturn is counterproductive and ill advised.

The California Taxpayers’ Association has conveyed this taxpayers’ perspective on the state’s budget problem to members of the state Legislature and the governor.