I thought about starting two threads since these are two rather distinct questions but I’d wind up explaining myself twice and no one wants that.
So I’ve been hearing a lot of stuff about California’s budget crunch. It was news before but it’s been everywhere that death of celebrities hasn’t been in the past few days. I happen to live in one of the few states with a budget surplus so I;ve been examining it with quite a bit of distance. And as I’ve read the articles, read the discussions, and read the threads a pair of unrelated questions have formed.
First: California has one of the highest tax rates in the country despite the complications of raising taxes there. And everything I can find with solid numbers (which sadly is few and far between) doesn’t make the cash outflow seem that bad so what is California spending all of their money on? It’s something that’s had to get real answers to on the net because the signal is flooded with noise but from what I gather the major programs aren’t overfunded per capta so I’m left wondering what’s happening to all of their cash.
I know there won’t be an easy answer there but a general idea would help. Are they getting nickeled and dimed by hundreds of small socialist projects? Or are greed corporations funneling the cash into their backroom dealings? (Sadly pretty much all of the commentary that tries to focus on the actual nature of the problem is just about on the level of those last two questions.) Is it all the debts they floated for twenty years coming due at the same time?
I can understand how a state like California could start off bad and then sink deeper and deeper into problems. I just can’t work out where all of their money is going to this year.
Second question: from what I recall of the economics I took taxes function on something resembling a parabolic curve. If you tax 0% the government gets nothing and if they tax 100% they get nothing and there’s a spot somewhere in the middle that’s the government’s ideal tax rate. A point where they get a maximum amount of income because the cash cycles through the economy many more times.
(I know I’m grossly oversimplifying here for the sake of getting to my point.)
So with regard to California, are they on the far side of that tax curve where cutting taxes would net them more tax revenue?
I recognize that the time for trying that would have been five years ago and not today; revenue returned to tax payers is just going to go into reducing debt and savings at this point. And a tax cut to boost state revenue would take years to work through the system when California is bleeding out right now. So my question is just curiosity if something like that could have worked for California.
It’s occurred to me as I type the previous paragraph that the question also implies that a tax hike now in California could potentially reduce state revenue in the long run. I wasn’t trying to slip a politically loaded question into that (though I’m sure both of my questions will cause some responses along those lines); I’m more interested in the problem from an economic theory point-of-view.
Laffer Curve.
It would be dificult to intelligently answer your other questions without seeing the specifics on California’s budget. California is the third largest state and largest in population. Infrastructure spending alone would be significant. Illigal immigration might be a factor, but that’s just speculation.
I blame the California proposition system. Ever since I moved to California ten years ago, almost every time I have voted there have been multiple propositions on the ballot to pay for [insert random expensive thing here] using bonds to the tune of tens and occasionally (I believe) hundreds of millions of dollars. The justification is always that “oh, this doesn’t cost anything or raise taxes because it’s financed through a bond,” with apparently NO understanding of the idea that bonds, you know, are borrowing money. Also, the “random expensive thing” is usually something no one could really object to on general principles, like a children’s program, a hospital, a children’s hospital, etc. They ALWAYS pass.
The most egregious, in my opinion, was the November 2008 $10 million proposition to build a high-speed train, as at this point, to me it was already clear that California was in deep, deep budgetary trouble, but apparently not to 52% of the California voters, who thought this was just a dandy idea.
However, my Google skills were not sufficient to look at how much the passed propositions actually cost California as a percentage of the budget, so I could be off base. I would love to see an actual number/cite, if someone can dig one up.
That thread has a link showing that California is not actually the most highly taxed state.
One major cause of the problem is that due to Prop. 13 California’s revenue is primarily from sales and income taxes. These are far more variable than property taxes, and have taken a major hit this year due to the recession. During a recession there is more demand for social services, so cutting the budget makes things worse - and in fact can deepen the local recession if state workers are laid off or have their pay cut.
If there are lots of socialist projects around here it escapes me - except perhaps for the increase in prison spending thanks to the three strikes law.
Here’s a good breakdown of the spending and how it’s changed in the last ten years. To me, the saddest part is seeing how the spending in higher education has shrunk while almost everything else has soared. There’s been a lot written on the reasons for the current crisis, including lack of leadership from the executive and legislative branches, partisanship, the 2/3 majority rule for budget approval, the state’s proposition system, Prop 13, term limits, the global recession. Well, all of these factors have contributed to the problem. However, the basic problem was to authorize spending without having solid sources of funding.
I left California right around the time of the brown-outs, when the Governor stepped in and tried to solve the problem with long-term power contracts. The short-term market problems causing the brown-outs went away in a year or so, but 15-year power contracts locked the state into higher rates. It’s that kind of meddlesome thinking that I point the finger at (and, which seems to have been carried up to the federal level by both parties).
But… a bigger part of the problem might be illustrated by the fact that I did leave. According to a Newsweek article from some months ago, California’s middle class has been leaving. It may be a shift of only a few percentage points, but if you reduce the middle class and their tax revenue and replace it with a lower class that is more dependent on state aid, you get a crunch on the budget even in good times.
Minor nitpick - that is a $10 billion proposition, not $10 million. Little bit of a difference. And it will cost California ~$20 billion to repay the bonds with interest over the next 30 years. And that $10 billion only covers part of the estimated cost of the train project - total cost is estimated at $40 billion or so.
Data on California State Revenues and Expenditures can be found on the California Legislative Analyst’s Office web site. (Warning: MS Excel Pivot tables)
Data on how California Revenues and Expenditures compare to other states can be found on the U.S. Census Bureau web site. (Warning: Again, MS Excel files)
Thanks for all of the information everyone. I knew there couldn’t be easy answers since if it was simple then the California legislature would just do it and be done.
And it will cost California ~$20 billion to repay the bonds with interest over the next 30 years. And that $10 billion only covers part of the estimated cost of the train project - total cost is estimated at $40 billion or so.