December 2001

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Cal-Tax Commentary 

Larry McCarthy is president of the California Taxpayers' Association.

The state’s $80 billion general fund has a projected deficit ranging from $8 billion to $14 billion over the next 18 months, according to various forecasts.  There are some responses that lead to additional problems and must be avoided.   There are also opportunities for state and local policy-makers to make the state more competitive for jobs and still meet priority needs of Californians – without raising taxes.

With the state’s business climate and taxpayers’ best interests in mind, policy-makers should:

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.

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early 1990s budget-balancing ploy applied the sales tax to snack foods, touching off a consumer backlash until it was rescinded.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example: A maritime bunker fuel tax drove suppliers – and jobs – out of California, until the Legislature and governor rescinded the levy.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.

Apply economic stimulus to create jobs and expand the state’s economy. Employment growth in California is the state’s biggest revenue opportunity for the state general fund and local government treasuries. 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.

That is why policy-makers must continually review costs of doing business in California and 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 retirement accounts.

Further, government should create a more hospitable business climate by devoting additional resources to needed transportation, school and housing projects. Approval of Proposition 42 on the March 2002 ballot is vital to ensure that existing sales tax revenue stemming from purchases of motor vehicle fuel is used to improve and maintain the transportation infrastructure.

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 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 overcome and turn out to be an opportunity to improve the state by reducing wasteful programs, 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.

Cal-Tax has included $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. 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.

Consider performance contracting. Bringing competition into the public service delivery systems, performance contracting has produced savings ranging from 10 percent to 40 percent in jurisdictions that have used this option.

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. Lower-priority government programs cannot be immune from review.

California’s response to the state’s budget deficit is a factor in economic recovery for the state.

The California Taxpayers’ Association has conveyed this taxpayers’ perspective on the state’s budget problem to members of the state Legislature and the governor.  More detail on the entire package is at Cal-Tax Online: www.caltax.org.