That’s what California’s once and present Gov. Jerry Brown said as he revealed the $8.3 billion in cuts he’s proposed in a belated move to plug the $15.7 billion deficit in the Golden State’s budget:
LOS ANGELES — Struggling to contain mounting state budget shortfalls, Gov. Jerry Brown on Monday proposed $8.3 billion in spending cuts, including slashing state employees pay and spending on social programs and prisons. He warned that California would have to impose another $6 billion in cuts on public schools and higher education if voters fail to improve his initiative this fall to raise sales and income taxes.
Mr. Brown said the state was facing an estimated $15.7 billion shortfall, up from $9.2 billion in January. He blamed the worsening state budget situation on the slide in California’s economy, which has led to less revenues than he had projected just last year, and court decisions preventing the state from imposing cuts voted on this year.
Also among his proposals were a 16% increase in school spending, a quarter-cent hike in the sales tax, and an income tax surcharge to wealthy voters.
Gone unremarked upon are why California’s tax revenues are coming in lower than they expected and how the proposed changes will affect that. Under the rubric that if you tax something you’ll get less of it, presumably the governor believes that California’s problems are too much retail sales and too much income. Maybe this time will be different.
For more than a century two of the primary pillars of California’s economy have been farming and housing construction and sales. Housing will need a major bounce-back to regain its prior pride of place.
Is the inverse true? Under Prop 13 we’ve limited property tax and we got a hell of a lot of real estate. Did that help to create the housing bubble in California?
To be honest both the proposition and its opposite depend on something called “the price elasticity of demand”. That’s a fancy way of saying how much the quantity sold varies with price.
Imposing a tax on something effectively increases the price. If the price increases 1%, the quantity sold can decrease (“elastic”), stay the same (“inelastic”), or increase (a “Veblen good”). Empirical studies have found that, for example, soft drinks or discount airline tickets have high elasticities, i.e. if the price goes up by 1% the quantity sold will go down by nearly 1%. In the U. S. pediatric doctor’s office visits have extremely low elasticity—a 1% increase in price results in something like something like .03% decrease in the number of pediatric doctor’s visits.
The problem with a sales tax is that it’s regressive, i.e. falls most heavily on the poor and if tax revenues are paid out in salaries to people with relatively high incomes it’s a redistribution from poor to rich. Imposing increase sales taxes on some good can have the perverse effect of actually decreasing the amount of sales tax revenue realized (the price elasticity is very high).
Michael,
Florida doesn’t have an income tax, but property taxes are about twice what they are in California. Florida got hit a lot harder than California did. Property tax might be a factor in the bubble, but other factors are probably a lot more important.
Also, if I understand Prop 13 correctly, the tax basis resets when a property changes hands or is significantly improved. In that case, it seems like a bubble which causes a lot of property to change hands would benefit property tax revenue in California.
Also, given California’s problems I think they should probably exit the dollar.
I know I sound like a broken record on this but a lot of California’s fiscal problems are due to the high cost of healthcare. The number of people on Medi-Cal has risen pretty quickly; something like 8 million people now.
I’ve always assumed the property tax caps were part of the problem with the California housing market. The primary benefit from the caps is derived from holding your property and not selling, that means it reduces the supply of housing, which should increase price.
It also creates an incentive to overextend with a large first purchase. Property taxes (and prices) are going up, so there is less incentive to save or buy housing incrementally (step-ups from starter homes to full-sized family homes). If you feel time is against you, you’ll overpay.
(Not that these are the only dynamics in play, I just think the limits exacerbate them)
California’s spending by function.
Thanks, Andy. If anything that understates the role of healthcare in the state’s budget. Big chunks of the education and protection line items are employee healthcare insurance for teachers, administrators, police officers, and firefighters. The pensions line item might also include state contributions to public employee retiree health plans.
Dave,
All true. I wouldn’t be surprised if health spending was close to 1/2 the total budget.
Andy is right, that when a property is sold, there is a reset of sorts. The new property tax is calculated by 1 1/4% of the sales price. Every year, thereafter, property taxes cannot be raised more than 2%, unless something is permitted, and that additional value to the property is then added in.
Prop 13 gives property owners some kind of perimeters to their taxation, as this is the first place government goes, is the property owner when it comes to funding any local school bond issues etc.
Excessive spending and being weighed down by defined pension plans is the reason that CA has financial problems. Liberals like to blame Prop 13. But, revenues have constantly risen here, only to be exceeded by all the programs that dems love to legislate. Even the democratic state treasurer, a democrat, has publicly chastised the free-wheeling democratic legislature on their spending habits, going as far as to say they should look to their republican cohorts for some fiscal wisdom.
Such advice, though, has fallen on deaf ears. In the meantime Jerry Brown wants to enact some ‘temporary’ taxes on the rich, as well as a higher sales tax to remedy our out-of-control budget. It will bring in more revenue, he says. Maybe, short term it will do that, as people sell off assets before the new taxation goes into effect. However, very much like osmosis, people will just drift away to other areas of the country that have less onerous taxes, which will only create diminishing revenues for CA.
“However, very much like osmosis, people will just drift away to other areas of the country that have less onerous taxes, which will only create diminishing revenues for CA.”
My dear, dear Jan. Haven’t you been reading Michael’s screed? This is all false. No one would ever move on account of taxes, regulation an sech.
Soon, Tiburon will be inhabited only by the very wealthy, and I think thats what they really want.
Meanwhile, back in Illinois…. “very much like osmosis, people will just drift away to other areas of the country that have less onerous taxes, which will only create diminishing revenues for IL.”
Tee-hee
SACRAMENTO MADE IT VERY CLEAR THEY DO NOT WANT BUSINESS IN CALIFORNIA.
SACRAMENTO (much like washington) SPENDS OUR MONEY FOR CRAP!….but we keep voting them back in.
Bankruptcy should have happen long ago . WE WERE WARNED..
none of this is a surprise ~ CALIFORNIA IS THE DUMPING STATE!
Who do you think lives here now? Although it’s the Belvedere people who really have the money.
“Florida doesn’t have an income tax, but property taxes are about twice what they are in California. ”
Think there’s a connection? It’s the same situation in New Hampshire. Somebody has to pay for schools, etc. Without a broad-based tax, guess who that might be? I was always amused by folks who moved to New Hampshire to escape Massachusetts taxes…and continued to work in Massachusetts.
Not the recent one, no.
This is what is called unit elastic. Take the %’s and ratio them into each other and you get 1 (technically negative 1). Something that is elastic typically has a larger quantity response relative to the price increase. A perfectly elastic good has an infinite elasticity (technically negative infinity).
Don’t worry ObamaCare (TM) will take care of it.
Actually we work harder so we can voluntarily give the extra money to the good government which is looking out for and doing a swell job.
I love my state government. They never force me to do anything like pay taxes. They are the best.