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Defining the Structural Revenue Shortfall

by: Robert Cruickshank

Fri Feb 22, 2008 at 11:41:44 AM PST

If you tuned into my appearance on Wednesday's "Which Way LA?" show, you heard me discuss a "structural revenue shortfall" - that since 1978 California has simply not generated enough money to pay for its basic services, from public education to transportation to water. I thought I would expand on that concept this morning, and explain in more detail exactly what I mean by it.

Arnold and the Republicans would have us believe that our budget deficit is caused by overspending in the "good times" that leaves us with huge shortfalls when the economy turns sour. But there isn't $16 billion in "overspending" and Arnold knows it, as proved by his $4 billion cut for California public schools. Others claim that the problem is locked in and/or frivolous spending - but here again, that only accounts for a tiny fraction of the massive deficit total.

No, the real problem is that since 1978 this state has cut nearly $12 billion in taxes. This was done during economically prosperous periods, particularly the 1990s. And that lack of revenue has piled up over the years - the state has fallen further and further behind to the point now that our state's governor is seriously proposing ending public education as we know it.

Details over the flip...

Robert Cruickshank :: Defining the Structural Revenue Shortfall
Most of the information in this examination comes from the California Budget Project - of whom I have become a huge fan - and specifically their report Two Steps Back: Should California Cut Its Way to a Balanced Budget, released earlier this month. The report is a devastating indictment of this state's addiction to tax cuts, an addiction that now threatens our ability to function as a modern society.

We have a structural revenue shortfall - in other words, since 1978 we have not raised the money we need to keep our schools, parks, hospitals, and roads open and in good working order. We have instead preferred to waste our money on tax giveaways for a few people while middle- and working-class Californians get stuck with higher costs for lesser services. As we face new crises, such as climate change, the need for public investment is that much greater - and the structural revenue shortfall makes it even more difficult for us to adequately respond to these needs.

Let's look at the specifics. When we talk of a structural revenue shortfall, most people immediately think of Prop 13. As we explained back in January, Prop 13 was a radical solution to a temporary problem. Conservatives ensured that the state would not have enough money to pay for its basic services by slashing property taxes and then severely limiting the ability to raise them (or any other tax).

But the structural revenue shortfall is not a product of just Prop 13. Since 1993 there have been various tax breaks, for corporations primarily, that cost us $12 billion this budget year alone. These rates were reduced during the "good times" of the 1990s economic boom, but they're costing us dearly today. If corporations paid the same rate in 2005 that they did in 1981 we would be collecting $7.5 billion more each year in revenue. (These numbers are taken directly from the CBP report.)

Half of that $12 billion comes from the loss of the Vehicle License Fee revenue. As Mark Leno explained, this is the classic example of reckless tax cuts during the "good times" that come back to hurt us in the "bad times." The CBP estimates that for this budget year (2007-08) we would have taken in $6.1 billion from the VLF had Arnold not killed it as his first act in office. That, as the CBP notes, is more than Arnold's cuts to K-12 education, parks, and health care combined.

All so that California drivers can save a measly $150 a year. It is an unconscionable situation - the LAUSD is facing $460 million in cuts that would mean the closure of 22 high schools, the firing of 5700 employees, and an 8% pay cut for those that remain. Is this really worth a $150 savings for drivers?

The CBP report also shows that these tax cuts have gone disproportionately to the wealthiest among us. In fact, the poorest among us now bear the largest share of the tax burden. The lowest 20% income brackets pay 11.7% of their income in state and local taxes, whereas the top 4% pay only 7.1% of their income. The result is that  lower income Californians have a higher tax burden - but get less in return for those taxes.

Republicans, ignoring all of the above facts, instead argue that our problem is too much spending. It's true that spending has risen, but why exactly has this increase happened? Natural population increase, as well as the rather significant inflation we've been facing this decade, is what makes the cost of government rise. The fastest growing segment of the population is, in fact, the elderly - not immigrants - which explains why the cost of social services is rising significantly.

So let's sum up what we have here. In the flush years of the 1990s, California enacted tax cuts that now cost us some $12 billion a year. Spending is rising, but that's what happens when you have both a growing and aging population, and that increase in spending is on core programs - health care and education - not on frivolities. Half of this tax cost - $6.1 billion - is due to the VLF alone. We are going to destroy public education just so drivers can save $150 a year.

Reversing these frivolous tax cuts would potentially eliminate the need to make crippling spending cuts. And the California Tax Reform Association has identified several more tax changes that could bring the revenue total to $17 billion.

Finally, let's remember the big picture. Tax cuts do not create jobs - people create jobs. People who are educated, in good health, and who have a modern support system, from transportation to water infrastructure - they are the ones that create jobs. It's no accident that California became a global leader in innovation and growth only after the 1960s, when we made the proper investments in public services. We've been living off of that investment for over 30 years now, and unsurprisingly, we've found we can no longer do it.

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Excellent radio appearance (8.00 / 1)
Good work, Robert. It's too bad they didn't keep you on the show to talk about the declining newspaper model. I'm sure you would have had something to say about that too.

I think?

Great summary (8.00 / 2)
Now is the time to rally Californians to stomp out the Republican's permanent tax cuts for the rich. The rest of us need the state to work and that means we need the rich and the merely comfortable alike to pay their fair share.

I'm intrigued by Randy Shaw's call for a recall of Arnold. Lots of good thinking in that one.

Can It Happen Here?

Excellent post! (8.00 / 1)
Keep it up.

Sadly, I find out every day that many, many citizens have no idea what is going on, even though they can see it with their own eyes as the infrastructure our parents funded and built decays right in front of them, they cannot grasp the concept hammered out over two thousand years ago that....

The people who pay taxes are the people who can pay taxes and that.....so said Aristotle.

Without taxes the state dies.

And the citizenry dies with it....

Keep pumping out the word. I sent this to my email list and will be talking about it incessantly.

this really cannot be overstated (0.00 / 0)
between decades of deliberate underfunding at the state level and the billions of dollars thrown down a hole with each new imperial adventure at the federal level, the hole we find ourselves in is one which we dug ourselves.

this really needs to ge our carthago delenda est. hammer it home until every single californian hears it, and can connect it to the pain they're feeling in their communities.

these "crises" are always portrayed as unstoppable natural disasters, but they're a lot more like arson than a random fire (and perhaps most like those mega-forest fires burnign exurbs in socal, where years of bad policy have set us up for a collapse, now that i think about it).

demystifying these structural crises is the first step to imagining solutions to them.

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