Almost everyone in and around California's state government knows something realized by only a few who are not directly involved:
It's not the two-thirds vote requirement that's been behind the budget delays and IOUs that have plagued this state. It's not even the huge ideological divide that sees Democrats defend labor union interests at every turn while Republicans fight firmly against the tax increases craved by public employee union leaders driven to produce both job security and constant raises for their members.
Nope, the root cause of the problem has always been revenue and its unsteady flow. Revenue, as in tax dollars.
When revenue falls, state government cuts jobs and services, because rainy-day reserves have never been adequate, and for sure the state can't stop paying interest on its bonds. The state also can't print money the way the federal government can when it runs short or wants to create an economic stimulus.
So there's got to be a way to even out the boom and bust cycle of tax revenues. Funds flowed at flood tide during the dot-com boom of the late 1990s, when stocks rose exponentially and investors who cashed out paid taxes on their enormous capital gains.
What Caused Expansion
It was the same during the real estate bubble early in this decade, when homeowners by the tens of thousands “flipped” properties for profits in the 20 percent to 50 percent range after holding them two years or less.
Those capital gain taxes translated into expansion of the state and local government workforces, from police to fire protection to clerks at the local Department of Motor Vehicles office, teachers, nurses, prison guards, park rangers and sewage treatment workers.
The first of the modern spate of budget impasses in the Legislature came after the dot-com bust, when expected tax revenues didn't materialize and lawmakers fought over whether to raise sales and income taxes to make up for it, or just cut back.
The same battles were re-fought this summer, when tax intake fell about $60 billion short of levels predicted by supposedly reliable forecasters just 18 months ago.
It's a boom/bust cycle that must end and only a fundamental change in the tax system can do it. Something has to happen to end the huge fluctuations that have reflected ups and downs of the state economy for a century and a half, dating back to the Gold Rush era and extending up through aerospace booms and busts, the dot-cot phenomenon and a series of real estate bubbles and bursts.
A Habit That Will Not Budge
But the state plainly will never stop taxing capital gains as a major class of income and it shouldn't.
Nor will the ballyhooed notion of legalizing and then taxing sales of the state's huge marijuana crop solve much. At best, this might bring in about $1.8 billion per year, less than one-thirtieth of the $60 billion shortfall of the last year. And even that $1.8 billion estimate is based on the shaky assumption that pot prices would stay the same if it's legalized. How likely is that unless there's some sort of cartel-like conspiracy to keep prices up?
So the real necessity appears to be creating a large reserve to draw from in times of true emergency. Doing this would take willpower of a sort elected officials have rarely shown. For creating a large reserve — $10 billion or more — can only be done while revenues flow smoothly and trend upward. But those are the very moments when Californians of all stripes usually figure the good times will roll on forever, causing them to spend freely.
Meanwhile, a flat tax, where every Californian pays the same percentage of his or her income regardless of how high that income is, will never fly in the Democratic-controlled Legislature, even though it's favored by some Republicans on Gov. Schwarzenegger's ballyhooed Commission on the 21st Century Economy, better known as the tax revision panel.
Nor is any significant amendment likely for Prop. 13, the 1978 ballot initiative that limits property taxes to 1 percent of their 1975 levels or 1 percent of the latest purchase price, with only small increases allowed from year to year.
But an update in how changes of property ownership were defined by the 1979 Legislature does make sense and might produce as much as $12 billion per year in new revenue by closing a massive current loophole without imposing any new taxes.
All of which means it will take a little courage, a lot of ingenuity and quite a bit of patience before conditions are right for starting to build a solid state reserve. Just because the so-called leaders who ran this state in the 1990s and early 2000s didn't exhibit those qualities is no reason why today's elected officials should not. The least they can do after inflicting panic and hardship on the state's populace for months is try to stabilize state finances so this summer's pathetic IOU-spattered scene is never repeated.
Mr. Elias may be contacted at tdelias@aol.com
For more of his columns, visit www.californiafocus.net
