Well, it’s been just about a week since the Governor came out with his May revision and the commentary hasn’t slowed down one bit. Most of the attention thus far has focused on the "sale" of the lottery and whether that truly is more borrowing or not.
No matter how you look at (borrowing or not borrowing), this one time source of revenue would be used to plug the deficit for up to three years, but wouldn’t solve the long term budget problem. It‘s pretty ironic, since Governor Schwarzenegger came into office with a promise to fix the budget, that the real budget fix will be left for the next Governor.
The most important issue in this budget is the "ongoing structural deficit". Spending on an ongoing basis will continue to outpace revenues, and the estimates are that the ongoing deficit will be between $5-6 billion annually. This does not include the payments that will come due for the unfunded retiree health liabilities, which are likely to add at least another $2 billion or more on an annual basis.
The Governor has proposed a spending limit and a reserve fund, but one of the major issues that continues to be unaddressed is the volatility of our state tax system. The bulk of the State’s general fund revenues are made up of receipts from three different taxes-income tax, sales tax, and the corporate and banking tax. Over the years the income tax has provided an increasing percentage of the general fund revenues and of the three major sources of revenue it is by far and away the most volatile.
The income tax is a very progressive tax and is obviously impacted by the changes in income of California’s most wealthy residents. It goes without saying that when individuals are making a lot of money tax receipts are high, and when they are not, tax receipts are low. This has resulted in wide swings in the State’s general fund revenues due to the volatility of the income tax receipts. In contrast, sales tax revenues are much more predictable and less volatile.
Besides the Governor’s proposal for a spending limit and a substantial reserve, it is time for a revision of our State’s tax structure.
- The state income tax should be made less progressive. This would not only reduce the volatility in tax receipts but would also encourage more capital investment from wealthy individuals, generating new jobs in California.
- The state sales tax rate should be lowered, but should be more broadly applied to services. As our economy has increasingly become service based, it doesn’t make any sense to not apply the sales tax to movie and concert tickets, accounting services, and other such services.
These revisions can be enacted without changing the overall tax burden–not an increase or a decrease, and at the same time reduce volatility of the state’s tax receipts and benefit our economic growth.
It’s time that we stop this roller-coaster and solve our budget problems. A spending limit, a reserve fund, and a revision of our tax system will do the trick. Let’s not leave it to the next Governor.