California

1. 
   2009 March 27

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   “I’m programmed only for victory,”
   Schwarzenegger, joined by legislative leaders from both parties, met with The Chronicle’s editorial board to ask for support for all six budget measures on the May 19 special election ballot.

   The measures, numbered 1A to 1F, stem from the Legislature’s efforts this year to close a nearly $42 billion budget gap. If passed, the measures would provide an estimated $5.8 billion in borrowing and revenue transfers and authorize an extension of temporary state taxes to bring California an additional $16 billion in new revenue.

   It’s important to pass all six budget measures, Schwarzenegger said.

   “They’re all interconnected,” he said. “It’s not like going to the grocery story where you can pick and choose.”

   Even so, Proposition 1A is the key to the package. By putting a cap on new state spending and creating a new, larger rainy-day fund, the measure will smooth out a decadeslong cycle of boom and bust in California’s budget that has brought financial chaos to the state, the governor said.

   That proposed measure “would never have happened without the economic crisis,” Schwarzenegger added. “Crisis brings opportunity.”

   But opponents of the measure say they’ve heard the governor’s claims before. In 2004, Schwarzenegger put a pair of budget measures, Proposition 57 and Proposition 58, on the ballot, promising that they would solve forever the financial problems he said were caused by a free-spending state Legislature.

   The measures passed, but the troubles didn’t end.

   “We’re hearing the same argument the governor made (in 2004), that this is the answer to the state’s problems,” Jon Coupal, president of the Howard Jarvis Taxpayers Association, told reporters earlier this week. “But this is a $16 billion tax increase masquerading as tax reform.”

   Two of the leading GOP candidates for governor, state Insurance Commissioner Steve Poizner and former eBay CEO Meg Whitman, have come out against Prop. 1A, as have the League of Women Voters and several Democrat-leaning labor unions and advocacy groups.

   But in 2004, no one could have predicted the worldwide recession that has drubbed the California economy over the past year, Schwarzenegger said Thursday.

   “This is an unusual situation for us to get into,” with the deficit growing month by month as the economy tanked, he said. “It was extraordinary to see … the budget balanced in (February) and by March find it’s out of whack by $8 billion.”

   Complaints about the measures are to be expected, said Assembly Speaker Karen Bass, D-Baldwin Vista (Los Angeles County).

   “All constituencies on both sides of the aisles are up in arms about different things,” she said.

   State Sen. Dave Cogdill, R-Modesto, lost his job as Senate minority leader because of his support of the budget deal. But he joined Schwarzenegger on Thursday in talking about the importance of the special election.

   When people say they oppose the budget measures, “ask them what is the alternative … and tell us how it can be done politically,” he said.

   While recent polls have suggested the budget measures could be in trouble on election day, Schwarzenegger believes that only means more work is needed to let voters know how this election can change California’s future.

   “I’m programmed only for victory,” he said. “I’ll travel up and down the state and work my butt off to let people know about this.”

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2. 
   2009 July 31

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   California’s tax system
   Smoothly does it

   As California wrestles with its budget, one group thinks deeply about its taxes

   AGAINST the clock, as usual, California’s leaders on July 20th hammered out a budget agreement. This just about plugs the fiscal gap which has forced the state, in recent weeks, to issue IOUs in lieu of cash and has wrecked its credit rating. The deal contains no new taxes (Republicans successfully blocked any such attempt), but imposes painful cuts to education, welfare and virtually every other part of state spending. The legislature was due to vote on it as The Economist went to press.

   What is to blame for California’s recurring, humiliating budget crises? The state’s Byzantine tax system, says Gerald Parsky, a private-equity investor. Mr Parsky is also the chairman of the bipartisan Commission on the 21st Century Economy, which was set up by the governor, Arnold Schwarzenegger, last year with a mandate to think bold thoughts about taxation.

   The commission has two goals. The first is to end California’s notorious revenue volatility. This is a result of the state’s heavy reliance on personal income taxes and in particular on capital-gains taxes paid by the rich (see chart). In good years, such as during the dotcom boom, revenues soar and politicians happily spend. In bad years revenues plummet and the budget cracks open. The second goal, as the commission’s name implies, is to modernise the tax system. The sales tax, for instance, applies only to goods, even though California has become a service economy.

   By all appearances, however, the 14 members of the Parsky commission have got bogged down in politics. They were originally due to report on tax filing day, April 15th. Then the deadline moved to the end of this month. Now it appears to be September. Many Californians have already written off the effort as yet another futile ritual in a politically deadlocked state. “These commissions come and go and produce a fancy report,” says Jon Coupal, the chief lobbyist for preserving California’s infamous Proposition 13, the voter initiative that in 1978 cut and capped property taxes in the state. “Then it gathers dust, and nothing’s ever done.”

   Utterly wrong, counters Mr Parsky. The commission needs more time, he says, because it has indeed achieved consensus on some things, with details still being discussed, and will propose to the legislature a package that eliminates or changes most of the existing taxes and creates an entirely new one. This is not about tax increases, he insists. Those might be impossible anyway, because the less known part of Proposition 13 was to require two-thirds majorities in both houses of the legislature to pass any tax increases, and the Republican minorities are large and partisan enough to block all such attempts.

   A tax increase might also be inadvisable. California is already a high-tax state. The Tax Foundation in Washington, dc, ranks California sixth among the 50 states for the overall size of its tax burden. The non-partisan Public Policy Institute of California (PPIC) ranks it 18th after counting local fees and taxes. Three states without personal income taxes—Nevada, Texas and Washington—are among the top destinations for people leaving California, although the size of tax flight is sometimes exaggerated, according to the PPIC.

   At first the Parsky commission leant towards a flat tax. That, however, raised hackles about shifting the burden to poorer people just as the state was cutting back on benefits in the teeth of a recession.

   The latest plan would eliminate the state sales and corporate taxes entirely, and would make personal-income taxes so simple that a return would fit one page. Courageously, it might nibble at Proposition 13, by letting commercial property be taxed more. But the main innovation is a “business net receipts tax” on the difference between gross sales and purchases from other firms. Mr Parsky says that this will be similar to a value-added tax, but “does not exist in exactly this form anywhere in the world.” California may be just the place to try it out.

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