Anthony P. Archie is a public policy fellow in Business and Economic Studies. Prior to joining Pacific Research Institute, Anthony earned his masters degree in public policy from Pepperdine University, specializing in economics and regional/local policy. As part of his graduate work, he co-authored Crisis in California: Reforming Workers’ Compensation, a proposal that drew praise from an esteemed panel of scholars and policy advisors. Mr. Archie has held internships on Capitol Hill and in the State Assembly. He received his B.A. in economics and political science from Pepperdine University. [Archie index]

We Don’t Have A Revenue Problem
It's the spending...
[Anthony P. Archie] 1/24/05

Last week, Governor Arnold Schwarzenegger released his proposed state budget for fiscal year 2005-06 amidst the buzz surrounding his reform agenda. The governor focused on the state’s profligate spending as the source of our deficit problem because, as he rightly noted, “we don’t have a revenue problem.” Despite this, there are still those who see the state’s fiscal woes as an opportunity to tax Californians more.

Among these stalwarts, State Treasurer Phil Angelides has been the most outspoken critic of the governor and his reform agenda. While denouncing Schwarzenegger’s plan as “unfair” and claiming he “broke his promises,” Angelides countered that he would further tax those who make over $500,000 a year to close the budget gap.

While Angelides’s plan is appealing to the big-government crowd, he fails to realize that his tax would hardly achieve the fairness he desires because it targets those who are already overtaxed. According to recent numbers, the top 11 percent of taxpayers (those earning $100,000 and above) paid a whopping 73 percent of personal income taxes in 2002. And now that Proposition 63 has taken effect, those who make more than one million dollars can expect over 10 percent of their income to go to the state. Judging by recent numbers, the governor is right – it’s not a revenue problem.

This year Californians sent an even greater portion of their dollars to Sacramento. According to estimates for fiscal 2004-05, General Fund revenues totaled $78.2 billion, up 4.6 percent from the previous year. Of this, $39.5 billion came from personal income taxes, $25.2 billion was collected in sales and use taxes, and corporate taxes raked in $8.7 billion. All three categories saw increases.

Not only did Californians pay more nominally, but after adjusting for inflation, Californians paid 29 cents more per $100 this year than they did last year. That calculates to a $189 increase for every person in the state.
California’s state and local taxes already take nearly 10 percent of taxpayers’ personal income, roughly the national average. But after federal taxes, California’s per capita tax burden is 10th highest in the nation. Business taxes are 12th highest. We don’t have a revenue problem. We have a spending problem.

The governor’s recent State of the State address and proposed budget highlighted this fact repeatedly. That’s why his plan includes a mechanism to restrain out-of-control spending.

The governor’s proposal mandates that either the legislature enacts a balanced budget within 45 days of the prescribed deadline or the State Controller will make across-the-board cuts in expenditures. Under a deficit scenario, spending would be reduced to the level of revenues.

However, while the governor’s plan balances future budgets, it will not control the growth of government. His plan allows for continued growth in funding of propositions 42 (transportation) and 98 (education). Therefore, it creates a future scenario in which raising taxes might become more attractive.

Only a constitutional expenditure limit, similar to Colorado’s Taxpayers’ Bill of Rights, will effectively limit the growth of government. By pegging annual spending increases to the rate of population growth and inflation, the cap controls spending and yields tax rebates when surpluses occur.

While Angelides and his fellow travelers continue to believe that taxes are the answer to California’s deficit problem, the only effective, long-term solution is to enact a spending limit. Just as every family must live within its means, so too should Sacramento politicians. CRO

copyright 2005 Pacific Research Institute

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