Feds to California — Drop Dead
Kurt Brouwer June 16th, 2009
This is not really a surprise. The signals from Washington D.C. have been fairly clear. Nonetheless, it does force the brain trust in Sacramento to focus on home-grown solutions. This piece from the Washington Post has the details [emphasis added]:
Calif. Aid Request Spurned By U.S. (Washington Post, June 16, 2009, David Cho, Brady Dennis and Karl Vick)
The Obama administration has turned back pleas for emergency aid from one of the biggest remaining threats to the economy — the state of California.
Top state officials have gone hat in hand to the administration, armed with dire warnings of a fast-approaching “fiscal meltdown” caused by a budget shortfall. Concern has grown inside the White House in recent weeks as California’s fiscal condition has worsened, leading to high-level administration meetings. But federal officials are worried that a bailout of California would set off a cascade of demands from other states.
With an economy larger than Canada’s or Brazil’s, the state is too big to fail, California officials urge.
“This matters for the U.S., not just for California,” said U.S. Rep. Zoe Lofgren, who chairs the state’s Democratic congressional delegation. “I can’t speak for the president, but when you’ve got the 8th biggest economy in the world sitting as one of your 50 states, it’s hard to see how the country recovers if that state does not.”
The administration is worried that California will enact massive cuts to close its deficit, estimated at $24 billion for the fiscal year that begins July 1, aggravating the state’s recession and further dragging down the national economy.
After a series of meetings, Treasury Secretary Timothy F. Geithner, top White House economists Lawrence Summers and Christina Romer, and other senior officials have decided that California could hold on a little longer and should get its budget in order rather than rely on a federal bailout…
I suspect the administration was tempted, but the certain knowledge that New York, Michigan and many other states would be coming, hat in hand, probably had an impact on their thinking.
Also, California’s problems are not particularly new nor are they the direct result of the current recession. The warning signs have been well-known for many years — unconstrained spending and a heavy reliance on tax revenues from capital gains, stock options and other variable revenue streams:
The Washington Post continues:
California’s budget is also heavily dependent on taxes paid on capital gains and stock options, which have been clobbered during the meltdown of financial markets. State budget analysts made their annual estimate of revenue a month before the crisis spiked in the fall and have been backpedaling ever since.
“Those revenue projections turned out to be wildly optimistic, but nobody was predicting the October collapse of the financial markets,” said Michael Cohen, deputy analyst in the Legislative Analyst’s Office.
Consider capital gains — income from sales of stocks or other assets. In California, that income dropped to $52 billion in 2008 from $130 billion a year earlier. It is estimated to be $36 billion this year…
Given the dire straits we are in, politicians want to turn to the old standby, raising taxes. Problem is, the state already has high taxes. For example, California is #1 in gas and sales taxes. It’s #2 in income taxes. State corporate taxes are already very high. The only tax that is even at an average level for the 50 states is property tax.
This chart shows how strong tax revenue growth has been in California for most of this decade. Yet, despite strong revenue growth, spending always exceeded revenues. So, now we’re in trouble. Had our legislators kept spending in line with revenues, we would not be in this mess.
Source: California Republican Party
As you can see from this chart, spending was about 9% over revenues at the beginning of the decade and it still exceeds revenues by that much, despite strong tax revenue growth. In fact, tax revenues have grown consistently for this decade at a substantial annual rate of 4.35%.
Will Californians Support Higher Taxes?
This poll from Rasmussen points to a trend I have seen from other polls as well. Californians seem to be fed up with their government. It appears that voters in the Golden State are also going to reject several ballot measures that would raise taxes as a means of easing the state’s horrendous budget crisis [emphasis added]:
California Voters Say Cut Government Spending, Don’t Raise Taxes (Rasmussen Reports, May 14, 2009)
…Seventy-three percent (73%) of California voters oppose raising state income taxes to eliminate the budget deficit. Raising the state sales tax is opposed by 69%.
At the same time, 69% favor major cuts in government spending to eliminate the budget deficit. Just 16% oppose the spending cuts.
…Some legislators and others say the problem really lies with the voters who want more government programs but aren’t willing to pay enough in taxes to cover them. However, 84% of California voters say the bigger problem for the state is the unwillingness of politicians to control government spending. Only eight percent (8%) put more blame on voters’ unwillingness to pay enough in taxes.
Fifty-two percent (52%) also say the state’s elected officials are most to blame for California’s budget problems. Fifteen percent (15%) say labor unions are most to blame, followed by 12% who blame the economy and 11% who see other special interest groups as being chiefly at fault. Just three percent (3%) say California voters are most to blame for the budget crisis…
So here we have an impasse. Legislators seem to be unable or unwilling to cut spending significantly. And, Californians don’t want higher taxes. Now that the Feds are out of the running for a bailout, the options are diminished.
Into the Ravine Below
When my younger son Luke was almost two years old, he watched a Thomas the Tank Engine video over and over. In that episode, a train went across a ravine on a rickety trestle bridge and then it crashed to the bottom of the ravine. He watched that video over and over and it always ended the same way. When the crash happened, Luke would intone, “Into the bine [ravine] below.”
When I see the news on fiscal and budgetary policy in California, I get the feeling I had when I watched the Thomas the Tank Engine video — the crash is coming and there is nothing we can do to stop it. We are all going into the ravine below.
Update: Standard & Poor’s Concurs
Zero Hedge blog reports that Standard & Poor’s is reconsidering ratings for California bonds. Here is an excerpt from the S&P report [emphasis added]:
…With the specter of approaching payment deferrals or issuance of registered warrants, the magnitude of the cash and revenue problem, and the limited amount of time left within which to make meaningful budget reform, downward pressure on the state’s rating is intensifying, in our view. A failure to address the structural budget gap leading to significant use of registered warrants, payment delays, and more acute liquidity strain could cause the rating to fall below the ‘A’ category...
That’s not good.
See also:
- Business , Economy , Geopolitics , Money , debt , income taxes
- Comments(4)
Did you enjoy this article?
” ‘The administration is worried that California will enact massive cuts to close its deficit, estimated at $24 billion for the fiscal year that begins July 1, aggravating the state’s recession and further dragging down the national economy.’ ”
This highlights why we are in such trouble. Our current state and federal governments believe that only government spending is good growth. There’s no effort (or ability) to understand secondary effects from all of the capital seizure through taxation and investment suppression through borrowing.
Despite my desire to stay in California, I can’t help but continue to plan the move of my business out of the state. That relocation is the fastest way to increase my ‘income’ by 10% and give me the operating capital I need to keep growing the business.
This presents an incredible opportunity for the center and the right to focus on the real problem confronting CA and IL, the canaries in the American coal mine.
There will never be a better time (and CA and IL are the best candidates) to place the blame squarely on where it belongs - rapacious public employee unions and the administrative class.
These two culprits feed each other’s political clout, and they have bankrupted entire states while providing less than quality services (I’m much more familiar with Illinois).
Run against the Unions, run against un-necessary prevailing wage costs, and most of all, run against the pork, payroll padding, perks, and obscene pension expansion of the governmental class.
Make this the ultimate ‘peasants with pitchforks’ moment, and use the ensuing (but temporary) political power to limit Public Union power for generations. Sell hard and fast caps on any governmental unit’s growth and forbid the use of debt as a definition of “estimated revenues” (in regards to balanced budget clauses).
The moment is arising. Unions occupy the position of the Soviet Union circa 1983. They may look strong, but they have killed the goose that laid their eggs, and the next 18 months will be the perfect time to make the connection in the heads of the voters.
One of the real ironies here is that Democrats (especially California Democrats) have long held the position that corporate profits were obscene. In the eyes of many this extends to the limit that any profits whatsoever are obscene. So be it. But just like the contradiction of constantly escalating a tax on cigarettes to fund health care, California Democrats can now look out the window and see corporations and investors where they want them — without profits. Unfortunately, these same Democrats believed that there was no limit to the extent to which they could tax these profits — profits which no longer exist. It’s sort of like New York which relied so heavily on income taxes on the rich which they so richly despised. For many of us, justice prevailed and many of the rich are no more. Now the state is moving in the direction of egalitarian social justice and discovering that the obligation to pay for government has now presented itself at the doorstep of “regular people”.
It is not unreasonable to despise and tax corporations, investors and the idle rich. It is not unreasonable to wish them away. But those wishes will ultimately result in the egalitarian nightmare that everyone will have to share in funding things done in the “public” interest. And yes, that will include the magically “tax increase exempt” population of those earning less than $250,000 per year
[…] Fed to California – drop dead Fundamastery […]