California's Budget: Time for Reform  

The economic problems facing California are severe and complex. There is no easy solution to the problem. Clearly it is not a matter of only increasing taxes or only cutting back the size of government. Such an either/or proposition does nothing to remedy a $42 billion budget shortfall.

That being said, context is properly set when we realize that the problem is not new.

As the recent past indicates, California runs budget deficits even when the economy is humming because the state's spending commitments, year in and year out, add up to more than the state's revenue system can consistently produce.

The reality is that California does not have a revenue problem, it has a spending problem. And like handing an alcoholic another Jager & RedBull, feeding that spending addiction with more cash, is not the answer - it merely accelerates the crash. Yet that is just what the current plan before the legislature proposes.
(Don't forget to figure out what your share will be under the proposed plan here.)

Even proponents of the current tax hike plan concede the plan doesn't balance spending and revenues 18 months from now. Even a fairly rapid recovery would leave what fiscal experts call the "structural deficit" intact. That means even if the plan were to pass today in it’s current form, 18 months from now (to quote Maxine Nightengale) we would be 'right back where we started from.'

The reality is that tax increases are economically harmful at all times, but they are especially harmful during a recession. President Herbert Hoover's decision in 1930 to increase the top tax rate from 25 percent to 63 percent contributed to the Great Depression. When California last faced a similar economic situation in the early 1990s, then-Gov. Pete Wilson and legislators took an approach similar to the current proposed plan, only to see the new taxes fail to generate the projected revenues and service demands soar as the economy continued to spiral downwards, creating new deficits.

Now is the time that legislators and citizens alike must look beyond the constraints of the state budget to solve the problem. So, by popular demand here is a list of proposals I would include in a budget package to get the state back on track.

Budget Restraint & Responsibility
The structural deficit cannot be fixed without significant reform. The budget plan must include a rainy day fund and a spending cap. We must ensure government spending grows no faster than the rate of population and inflation. In addition, we need to make sure that when state revenues are up, we tuck away some of that money for a rainy day. That way, when the lean years come, we'll have a responsible reserve to keep from having to make heavy cuts to state services.

Economic Stimulus & Tax Reform
California's 2009 Business Tax Climate Ranks 48th. The State has created an environment that puts business at a severe disadvantage. Therefore we must stimulate the economy by reducing the impediments to starting new businesses, hiring, working, and investing. The only quick, and effective, remedy is to cut tax rates.

California's Corporate Income tax rate is the highest in the west. By cutting the corporate income tax rate and reducing regulatory burdens on business, we will create an environment where businesses are willing to locate, not looking to leave (ie AAA, Nissan & most recently USAA). More business means more jobs means more revenues. We can improve the business climat by increasing flexibility in work schedules to reduce overtime payments, increase contracting for state services, simplifying rules on workplace meal and rest breaks, loosening deadlines for greenhouse gas regulations, and providing various tax credits to stimulate business.

California's individual income tax rate is the highest in the nation - the result? For the fourth straight year in a row more residents left the Golden State than moved here from other states, according to a report released in December by the California Department of Finance. As people leave the state, they take their tax dollars with them - yet another loss to the state general fund.

We should broaden the tax bases and lower rates. This ensures that California can generate extra revenue while bringing the state tax system back to the basic principles of good taxation: simplicity, transparency and neutrality. As we have previously proposed – it’s time to look at a flat tax. Instituting a 3.5% rate applied to all income would probably mean an extra $10 billion to the treasury. The single flat rate applied to all income, rather than the progressive, graduated system California uses now would increase revenues, simplify the tax code and ensure a more steady revenue stream.

Government Reform
Modeled after the San Diego program, enact a statewide “Project 100%” for Welfare recipients. It’s based on the simple concept that welfare benefits should be given only to those who are actually eligible for them. Ensuring that only those who are eligible benefit, eliminates fraud and ensures more money for those who are truly in need. In San Diego County, Project 100% has since its inception identified welfare fraud in approximately 20% of welfare applications and saved between $2.7 and $4 million every year. By initiating a state-wide program we can save hundreds of millions of dollars while still serving those truly in need.

Prioritize the sale of surplus property across California and pave the way for the state to receive as much as $1 billion or more in new money that can be used to pay down the state’s debt. California owns thousands of parcels of land and tens of thousands of vacant or under-utilized buildings. Everything from football stadiums to vacant warehouses located in the middle of the most expensive real estate in downtown San Diego. Removing land from the state’s surplus inventory eliminates the need to dedicate funds and administrative resources to ongoing property management and maintenance. These sales would help pay off bonds more quickly and free up precious general fund dollars for other purposes.

Making significant and dramatic changes to the way California conducts business and allows others to conduct business will prove to be far more important to California's fiscal health than the current temporary taxes and spending cuts that have generated political angst.

In the end we must do all we can to get California's economy rolling again. Letting Californian's keep their own money is a good instinct for lawmakers. Whether they save or spend that money, people are more likely to use their money wisely than if the Legislature decides where and how to spend it. But if the goal is also to encourage Californian's to use their money in ways that will encourage faster growth, it is far better to provide any particular amount of tax relief as long-term reductions in tax rates rather than as a merely temporary respite from the Franchise Tax Board.