Should “Tax Reform” in California be Connected to “Spending Reform”?

David Kersten
David Kersten is president of the Kersten Institute for Governance and Public Policy (www.kersteninstitute.org). Kersten is also an adjunct professor of public finance and economics at the University of San Francisco.

Discussions have been underway in the media and certain political circles in California for sometime that there is a dire need for “tax reform” in the State of California.

At the same time, there has been a separate debate in the media and other political circles about the need for “spending reform” in California, particularly public employee health care and retirement obligations.

But you rarely hear it discussed in the media and elsewhere that perhaps there is a need to combine the two discussions as part of one conversation on public finance reform in California.

As an adjunct professor of public finance at the University of San Francisco, I routinely stress that public budgets are composed of two equally important sides—the revenue, or tax side of the budget, and the expenditure side of the budget.

Furthermore, sound budget policy rarely disconnects one side of the equation from the other since the amount of money raised in a public budget determines the amount of money available to spend in that same public budget.

However, it has long been apparent to me in California that certain political constituencies, as well as politicians, commonly disconnect discussions of public finance into “tax reform” as a wholly different discussion from “spending reform.”

Furthermore, depending on one’s political persuasion it may not even be politically correct to raise the issue that there is perhaps even a need for “spending reform” and that all discussions of public finance should center on “tax reform,” and not “spending reform,” and that any discussion of “tax reform” must only consider raising revenues as opposed to lowering them.

After researching and teaching the California budget for more than 20 years, I believe that substantive discussions on both “tax reform” and “spending reform” are long overdue and badly needed to ensure the long-term fiscal health of the State of California.

That is why major California newspaper editorial boards have long advocated for tax reform, but at the same time have increasingly raised the issue of “unsustainable” public employee benefits costs (i.e. see LA Times series by Jack Dolan et. al.)

One prominent advocate for significantly higher marginal tax rates at the federal level (70% or higher), has said that the “world will end” in about 12 years if climate change is not addressed immediately.

After studying the facts and evidence on both sides, I can safely say that it is more likely that there will be a major public debt crisis in the United States, even one or more in California, than there will be a type of “doomsday” scenario caused by “climate change.”

But more importantly, perhaps the greatest power our politicians have is controlling the public purse and that invariably involves constructing viable public budgets. Climate change, on the other hand, is largely beyond the immediate control of most public officials.

Any honest analysis of the facts will yield the same conclusions, which makes one wonder why so many politicians in California and elsewhere appear to be much more focused on “climate change” than securing the long-term fiscal health of the public sector.

As the recent impending bankruptcy of PG&E illustrates, financial catastrophe and bankruptcy can have far-reaching impacts on the ability of both private and public agencies to achieve their “climate change” goals. Thus, we also see a clear link between public budgets and the ability of government to address “climate change” in a substantive way.

Over my career as a professor and public finance analyst, I have learned that an invaluable skill in effective public finance analysis is making the connections between multiple policy issues.

Just because many of our elected officials and political interest groups do not appear to make these connections, does not mean they do not exist.

As the Nobel prize winning Austrian economist F.A. Hayek has argued, the strength of and effectiveness of his analytical frameworks on economics, public finance and other issues largely stemmed from making connections between seemingly unrelated issues. Hayek termed these types of analysts to be “puzzlers.”

Thus, through this brief analysis it has been demonstrated that indeed “tax reform” and “spending reform” are essentially two sides of the same discussion and should be treated as such. In addition, the ability to address “climate change,” as well as other major public policy issues, is also linked to the fiscal health of our public agencies as well as private agencies, and should also be treated as such.

So the next time you hear an elected official in California and elsewhere raise the issue of “tax reform,” but refuse to address the issue of “spending reform,” that should raise a red flag that perhaps they are not telling the whole story regarding their political motivations.

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