Big Three Items are Eating State Revenues

David Crane
Lecturer and Research Scholar at Stanford University and President of Govern for California

California’s General Fund tax revenues have grown nearly 50 percent since a tax increase in 2012. But funding for most services has grown at a fraction of that pace. Eg, funding for courts has grown only 12 percent. That’s because tax revenues are increasingly being diverted to (i) pensions, (ii) subsidies for retired employees (“OPEB”), and (iii) enterprises reimbursed by Medi-Cal, the state’s single payer health insurer for 13.5 million residents.

Absent reform, the “Big Three” will consume ever-larger shares of the budget, which will lead to ever-more-frequent calls for tax increases. The pressure has already started. AB 2731 has been introduced in the State Assembly to impose a 17 percent tax on the “carried interest” earned by California investment managers. Pressure will increase even more during the next bear market, which will likely produce ~$60 billion in state deficits. Tax increases are always marketed as beneficial to public services but in California the real reason for now is to cover-up spending on the Big Three.

This is not about big vs. small government but about tax dollars not improving public services. California’s revenues this year are >$40 billion greater than in 2012 yet schools are laying off teachersemergency room visits are up, and UC, CSUcourts, parks and social services are still under-funded. That’s because the money is being devoured by the Big Three.

Tax increase pressures will not abate until pensions, OPEB and Medi-Cal are reformed. To our knowledge none of the candidates for governor has articulated a reform plan or a strategy for gaining 62 votes in the legislature for reforms. Next time you see a candidate, ask for their views on these important subjects.

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