As the special session gets underway, the new "Budget Nun" Mac Taylor, and since it's a he this time I think we'll go with "Budget Priest", has released an overview of the Governor's proposals. The first thing that pops out is we now have a new shortfall number: $28 billion for the next 20 months, and an unsustainable long-term deficit thereafter.
State Faces $27.8 Billion Shortfall. We concur with the administration's assessment that the state's struggling economy signals a major reduction in expected revenues. Combined with rising state expenses, we project that the state will need $27.8 billion in budget solutions over the next 20 months.
Long-Term Outlook Similarly Bleak. The state's revenue collapse is so dramatic and the underlying economic factors are so weak that we forecast huge budget shortfalls through 2013?14 absent corrective action. From 2010?11 through 2013?14, we project annual shortfalls that are consistently in the range of $22 billion, as shown below.
Overall, Taylor is generally supportive of the Administration's proposals for closing the gap, but I think that has a lot to do with the fact that the Governor is finally using realistic numbers and not employing any borrowing gimmicks. Compared to the 2008-09 budget, this is extremely welcome. However, Taylor makes the point that a short-term increase in the sales tax cannot possibly be the backbone of a long-term solution, and three years out we'd still see deficits in the range of $9-11 billion. Instead, he offers a couple points. First is one that I've been making a lot, that California needs to lobby hard for state and local government relief in the second stimulus package:
In the coming months, there is a good chance that Congress will pass economic stimulus measures in an effort to boost the national economy. In the past, some components of such measures have directly provided state fiscal relief. To date, the administration has not built any estimates of such relief into its budget numbers. For the time being, this is appropriately cautious to avoid counting on relief that may never come. The state, however, should continue to press the federal government for economic stimulus measures that will provide California with flexible fiscal relief. While such relief would not solve the state's budget problem, it could provide several billions of dollars in budgetary solutions.
(While we're at it, we could also recoup the $2 billion giveaway to Wells Fargo precipitated by the Treasury Department illegally changing the tax code to allow banks to avoid corporate taxes. Any California Congresscritters want to hop right on that?)
He also rightly notes that the Governor's tax proposals are regressive in nature, and offers one final solution - fix the VLF that you broke as your first act in Sacramento.
Alternative Program Realignment. As noted above, raising the VLF tax rate to 1 percent has merit from a tax policy perspective. If the Legislature made it the foundation of a program realignment with local governments, programmatic outcomes could be improved as well. Under this approach, $1.6 billion of state criminal justice and mental health programs could be realigned to counties and supported by (1) the revenues raised by the increase in the VLF rate and (2) most of the VLF fee revenues currently retained for administrative purposes by the DMV. By consolidating these program responsibilities at the county level, and giving counties significant program control and an ongoing revenue stream, we think California could achieve greater program outcomes and significant budgetary savings.
You can see the total savings chart at the end of this PDF, but clearly the VLF raise is the big story here. The LA Times picked it up as a news story and also on their op-ed page today. For those who counter that the VLF is just as regressive as the sales tax, it doesn't have to be.
Right now the VLF is a flat rate on the assessed value of a vehicle, which is based on its purchase price and a fixed schedule of depreciation (basically 10% per year). It's true that if all you did was raise the VLF to its old rate of 2% it would remain about as regressive as a sales tax (see Table 5 here), but that's not the only way you can do it. Unlike a sales tax, which needs to be a flat rate for administrative reasons, the VLF could easily vary by assessed value. It could stay at its current rate of 0.65% up to, say, $10,000 in assessed value, increase to 2% for more expensive cars, and increase still further to 4% for top end cars. The average rate would still be about 2%, but the incidence of the tax would be more progressive.
You can also build progressivity into the VLF by having it function as a carbon tax, essentially. You could set the VLF at a higher rate for cars that produce greater emissions, and at a lower rate for cars that are cleaner. As California is about to get a waiver to regulate tailpipe emissions under the Clean Air Act in a new Obama Administration, they would certainly be empowered to do so.
This is a repudiation of the very issue Schwarzenegger ran on in 2003. We'll see if he's inclined to own up to his mistake. |
