Eliminating the California Budget Deficit
by Fred E. Foldvary, Senior Editor
Governor-elect Schwarzenegger promised to eliminate the increase in the car tax (vehicle license fee), but that will increase the state budget deficit another few billion dollars to an estimated $20 billion. How can he keep his campaign promise yet also balance the budget?
The government of California could continue to get the car-tax revenues, but then rebate the increase to the car owners. The state would issue promissory notes equal to the tax increase, which could be redeemed when the state's budget crisis is over. The notes would be bearer bonds which would not pay interest, but which one could sell, so there would be a market for them for those who wanted cash now rather than later, although at some discount. The state could also suspend payments to the retirement accounts of state employees and replace these with promissory notes.
The entire budget deficit of the government of California could be paid if the state were to sell some of its property. It would be politically impossible to sell the state universities and colleges as well as the state parks, but the state owns billions of dollars of other assets it could sell.
There budget crisis is the result of a very rapid growth of spending by the state government. The expenditures need to be scaled back. The Reason Public Policy Institute has published a "Citizens' Budget" with a detailed analysis of spending items that can be reduced. Many state programs can be eliminated, scaled down, or suspended.
Examples of programs that can be cut or postponed include the gambling control commission, prison construction, school testing, the arts council, and the spending of the many state commissions and authority boards. Altogether $16 billion could be cut from the budget. This reduction in spending, combined with promissory notes, would balance the state's budget.
For the long run, the state has to reform its budget process and tax structure. California should adopt a two-year budget cycle. All state spending should be subject to performance-based evaluation. Education should be decentralized, with power going back to the local school boards. The state spends much more per student than private schools, so a voucher program would reduce state spending for schooling while improving education.
Governor Schwarzenegger is correct when he states that high taxes drive business out of California. The state should shift to revenue sources that do not hurt labor and enterprise. Charging for pollution and congestion would bring in revenue and also benefit the public. Ultimately, Proposition 13 needs to be replaced with a land-value tax. Another way to tap the state's land rent is to privatize all the neighborhoods. They would all become residential associations that levy assessments based on land value, revenue that is then used by the associations to obtain state and local government services.
A greater use of land rent, user fees, and pollution charges would enable the state to eliminate its income and sales taxes. The state sales tax should be entirely scrapped. Income and property taxes are deductible from federal taxes, while sales taxes are not. Sales taxes are regressive, as the poor spend a greater percentage of income on taxable goods than the rich. Sales taxes hurt both the poor and the rich, and give away billions of dollars to the federal government by not being tax deductible. There is no excuse at all for keeping the state sales tax.
If Proposition 13 cannot be repealed for political reasons, then the state income tax can be reformed to take more rent and fewer wages. Have a high exemption for wages, interest, and dividends. Include as income the imputed rent of land, what land would rent for in the market. Exempting wages and including the real economic rent as income would transform the state income tax into a mostly rent-based revenue source.
So there are many near-term and long term measures that can be enacted to put the state government on a much sounder financial structure. It depends on how radical the public is willing to get, and how much the public understands the economics of public finance. We reformers have a big task ahead of us, so let's get going.
-- Fred Foldvary
Copyright 2003 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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