California Patches Together a Budget, Sort Of

October 07, 2010

99 days into the fiscal year, California is reportedly about to approve its FY 2011 budget, closing a $19 billion shortfall. Details are sketchy about what's in it, although it's said to include a pension reduction for new employees and $7.5 billion in spending reductions.

Kevin Yamamura of the Sacramento Bee charitably writes that the budget "doesn't rely on accounting tricks," primarily because the state has used them all. The budget plan does plan on $4 billion more in federal aid than is currently promised, $1.4 billion in additional tax revenue from an improving economy, putting off $1.9 billion in bills until next year, and spending most of reserve funds. The $19 billion shortfall included $7.7 billion from last year's unbalanced budget.

The vague pension action aside, there's nothing long-term about this budget plan. It's about taping together something that with the veneer of responsible fiscal policy for this year and this year alone. It barely has that. (In addition to the belief that residents of other states are eager to bail out California some more, a bunch of temporary tax increases expire at the end of the year.) Gov. Arnold Schwarzenegger (R) came into office two terms ago pledging to deal with the structural budget imbalance, reiterating that determination every year, but this budget is about the same as each one over the past decade or so.

California is a high tax state. They are sixth highest in state-local tax burden as a percentage of state income. The sales tax is the highest state rate in the country even before the recent 1% increase, and numerous county rates keep them in the top 5 of state-local combined rates. Their individual income tax top rate is the second highest in the country, eclipsed only recently by Hawaii, and is sixth highest in the country in terms of collections. The corporate income tax is one of the highest in the country and sixth highest per capita in collections. Even the gas tax is the third highest in the country and the state Lottery has the fifth highest implicit tax rate in the country. Only on property taxes is California "low": 28th highest in collections per capita.

With this in mind, it's hard to say that California's problem is insufficient taxation. Ultimately, California voters need to decide whether they are willing to pay the taxes to fund the programs they want. The tax system prevents this from happening now, due to the state's overreliance on taxing capital gains, corporations, and high-income earners. Most Californians rightly think additional spending is a free lunch that they won't have to pay for.

That's why it's a golden opportunity for fundamental tax reform in the state.

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