State Budgets: California Reaches a Deal… For Now

July 22, 2009

California has of course been the granddaddy of budget woes this year, and been the subject of this Tax Foundation report. Years of spending more than tax revenue and covering it over with borrowing had led to a cumulative $26 billion gap between desired spending and revenue, a sliding credit rating, voter outrage at increasing taxes even more in one of the highest taxed states in the country, and the issuance of IOUs ($682 million worth so far).

The compromise plan reached this week cuts $15 billion in spending, perhaps some oil revenue, grabbing $4.3 billion in fund destined for local governments, and raises $2.3 billion by forcing taxpayers to provide the state with a zero-interest loan by increasing tax withholding by 10%. The last point in particular is yet another kick-the-problem-into-next-year “solution” that Sacramento seems to do every year, making each successive budget gap worse.

Some argue that Californians are selfish for demanding over $100 billion in state services but refusing to pony up the cash to pay for it. The real story is that California’s tax structure is so distortive (burdensome but heavily tilted toward high-income earners, capital gains, and corporate profits) that most taxpayers are probably right that state services are a free lunch for them. But because those revenue sources are so volatile and have now fallen away, the state has a budget crunch.

Depending on how structural the budget cuts are, I expect Sacramento will face some of these issues again next year. State workers this year continue to have to take 3 days of mandatory furloughs each month (itself an artifact of the state being unable to fire lower-performing employees). Hopefully the state will soon come to grips with the need for fundamental tax reform.

More on California here.


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