What’s Really Behind California’s Budget Woes

By Jim Shultz

Four years of record shortfalls have taken their toll on California. Our classrooms are the second most crowded in the country.

Fees at state universities and colleges have skyrocketed. Libraries and health care services are on the chopping block, and the safety net for the poor is being unraveled.

Governor Wilson has taken the position that the state’s priority must be to attract business, and that it can do so only if it keeps taxes low; the state’s budget, therefore, has to be balanced by cutting services and spending, not with any new taxes.

Democratic legislators have challenged neither Wilson’s reasoning nor his unrelenting stance against new taxes. Democratic insiders blame Proposition 13’s legacy requiring two-thirds vote of the legislature for any tax increase. They argue that the two-thirds vote hurdle, in combination with the GOP’s intransigent pledge of “no new taxes,” makes any tax increase effort futile and raw fodder for GOP attack mailers in the next election. It is also true that both parties have fallen equally captive to the special interest money which flows to the Capitol seeking to protect low tax rates and tax favors.

The results of this standoff are clear. Each new budget brings deeper cuts in public services. The deficit is trickled down to local government by raids on local revenue and a shifting to cities and counties of state responsibilities. In addition, legislators and the governor are playing a dangerous game with state debt which will haunt California long after they leave office.

We need a new strategy to turn the budget crisis around, but first we must make it clear who is not to blame.

Debunking Misconceptions

Immigrant children are not to blame. During the 1940s, ’50s, and ’60s California experienced a sustained baby boom far larger than the current one — an average increase of 62% in the school-age population every decade. Then California responded with broad public investments in schools, vaccination programs, libraries, parks, and higher education. The result was a legendary expansion of opportunity and prosperity. Today we are doing just the opposite. The truth is that California is abandoning its children just as a majority of them will be non-white.

Overspending on public services is not the problem. It is also popular to argue that the fiscal crisis is the result of California’s overspending on public services. In fact, over the course of the last 30 years, California has gone from being a high-tax, high-service state to one with average taxes and declining public services. From 1978 to 1990, state and local taxes as a percentage of personal income fell by nearly 25%.

The Real Villains

“A Tale of Two Futures,” a new report by the Center on Budget and Policy Priorities, Washington, D.C., paints a compelling picture of the root causes behind California’s fiscal nightmare. Countering the dangerous myth pushed by the governor and others that immigrants, children, the poor, and the recession are responsible for the current budget crisis, the report points out that California’s financial crisis is the result of long-term structural problems that even an economic recovery won’t solve.

The decimation of the property tax. When it was passed in 1978, Proposition 13 cut property-tax revenues in half. It also limited increases in property assessments until that property is sold. This means owners of downtown skyscrapers and other commercial buildings that haven’t changed hands since ’78 are paying taxes that have little to do with the current property value.

If commercial property were to be taxed based on its current value, California would have $2.7 billion to $5 billion more for schools and services.

The erosion of the sales tax. Even though California has one of the highest sales-tax rates in the U.S. (8.5%), the actual value of the sales tax is shrinking. Unlike most states, California taxes mainly goods, which constitute a shrinking share of the economy, not the service sector, which is where the growth is. If California were to follow the lead of 41 other states and add a sales tax to more services, we could lower the sales tax rate and still bring in substantial new revenue.

The hidden “tax expenditures.” California has a hidden budget of special tax exemptions, deductions, and credits that costs more than $20 billion each year.

Regular “direct budget expenditures” such as for schools and health care have to be defended and reallocated every year. “Tax expenditures” — tax exemptions — face no such scrutiny. In addition, these “tax expenditures” require only a simple majority vote of the Legislature to be enacted, but a two-thirds vote to be repealed. The result is a “tax-break roach motel” in which loopholes can get in but can’t get out. If we held the growth of “tax expenditures” to the same rate as regular spending, California would save $4.2 billion each year.

The ever-expanding prison budget. In 1977, California imprisoned 19,000 people. Today the total prison population is more than 113,000. Prison expenditures have soared from 3.9% of the general fund 10 years ago to more than 8% today. Prison spending totals nearly $3 billion each year and will increase with the passage of the “Three Strikes, You’re Out” law.

It is time for everyone, regardless of their political position, to address the budget crisis in a very different way.

Advocates of public services and tax reform need to do more than protest cuts. We must develop a coherent, unifying message that can speak to the public about the “big picture” of California’s fiscal crisis. This message must compete with and deflate the currently accepted myths about that crisis, it must reach beyond our traditional base and it must make the link between a healthy public sector and a healthy economy.

We need to educate ourselves to become effective public messengers. This means more than mastering rhetoric. A diverse choir of voices needs to be able to present the data and analysis in a strong, credible way.

We need to sing to the right audience. This begins with reporters and editors who filter the budget story to the public. It includes key leaders in business and academia. Business leaders need to move beyond the mantra of “We’ll leave the state” and recognize their own stake in a healthy public sector.

And we need to establish a real dialogue with the business community, the media, and others with the power to influence the people as a whole.