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Background of the budget gap
We have a structural gap in the California state budget. It has varied year by year, but runs in the multiple billions of dollars. The Wall Street financial meltdown and national recession, the worst in many decades, is wreaking further havoc on the budget of the state and our ability to fund necessary public services.
Last summer, and again this year, the governor and Legislature signed bad budgets, relying on borrowing schemes and inadequate revenues. This year the state is already heading for a new deficit estimated at around $25 billion.
Solving the budget gap in California requires a reasonable solution—one that the governor is pointedly ignoring, along with his role in creating the problem. This is a large state, with the largest population in the United States, and an economy that, if it were a country's, would be the seventh or eighth largest in the world. The budget problem can't be solved by cuts alone, because state program reductions of such a magnitude threaten the future well-being of California.
We need instead to increase state revenues with carefully considered tax increases, especially closing tax loopholes for those who can most afford to pay: the wealthy and large corporations. Taking these actions will allow us to fund the social programs we need. [Send a message to your legislators telling them to do this.]
Mostly undiscussed, but crucial to understanding California's problem, is that the state legislature, to get a recalcitrant minority of anti-tax legislators to pass state budgets, has rescinded taxes on the top income brackets and other progressive parts of the tax code. Each year since 1991, the state budget's ability to generate revenue has been compromised by removing one or more taxes. This has meant the accumulated loss of many billions of dollars in revenue (scroll to p. 11) contributing greatly to the current deficit.
Indeed, the Vehicle License Fee alone was worth $4 billion per year when Schwarzenegger, to great applause by the legislative Republicans, eliminated it. Add up the loss of that amount each year since Schwarzenegger's election, and you have the budget deficit. But Schwarzenegger clung, until very recently, to the position that he would not raise taxes. (Technically, the VLF is a fee; but since he called it "the Gray Davis car tax" throughout his recall campaign, that's what it remains in the public mind.)
Public services in general, and public education in particular, have been underfunded in California since 1978 and the enactment of Proposition 13. This law substantially shifted the burden of funding many locally delivered services to the state, without providing appropriate mechanisms to pay for them. Increased spending on education in the late 1990s and into 2001 was finally beginning to address years of neglect. Now the gains of these years have been reversed. Per pupil funding in California now ranks 47th in the nation.
What to do about it: Progressive Taxation
The revenue options below would raise an estimated $13 billion per year (and more when the economy recovers from the recession), essentially solving the state's structural budget problem:
- Reinstate the full vehicle license fee ($2.3 billion/year, with the adjustment from last year's budget already factored in)
- Bring the top income tax brackets back from 9.3% to 10% (individuals who make more than $250,000/year) and 11% (individuals who make more than $500,000/year) ($5 billion/year)
- Re-assess non-residential real property ($3 billion/year)
- Require that large corporations file as corporations, not “S” type partnerships ($500 to 600 million/year)
- Enact severance tax on oil produced in California ($1.5 billion/year with oil at $100 a barrel)
- Repeal the single sales factor loophole for multi-state and multinational corporations (1 billion/year)
These are each worthy proposals. But the real problem that needs to be addressed to solve California's budget problems is Proposition 13. It builds in inequities between residential and commercial taxation, and, depending on when a homeowner buys a house, inequities among homeowners as well. Reform of Proposition 13, which locks in a broken budget system, is an urgent priority.
Convince legislators and the governor
The problem with these ideas is that in California, any tax increase must be approved by a supermajority of 2/3 in the state legislature. California is one of just three states that require more than a simple majority to raise taxes. Each year a small minority of legislators, opposed to tax increases on ideological grounds, can block the will of the majority and prevent a balanced approach to solving the budget crisis. That's what happens every year, including last year, once again. Legislators should be able to enact a necessary tax increase with a simple majority instead of wrangling endlessly with hard core anti-tax ideologues.
Over time we must convince our legislators and the governor that only progressive tax reform can solve the long-term crisis. The problem isn't "overspending." This is a simplistic analysis of a complex problem. California is a big and growing state, and needs big revenues to function.
We are currently witnessing the return of the Gilded Age, in which the wealthiest among us continue to increase their riches at the expense of the rest of us. Currently the top one percent of wealth holders in the United States owns one third of the assets of the country. The top ten percent owns 70% of the wealth. That leaves the bottom ninety percent of wealth holders–the overwhelming majority–with less than a third of the country's wealth.
Don't let people tell you that "we don't have the money" for a decent public education system. The money's there. It's just in the wrong bank accounts.
Resources on the State Budget Crisis
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