Guest Contributor
Joe Armendariz

California Gives Junk Bonds a Bad Name
[Joe Armendariz] 8/20/03

If California were a business, there would be nothing left except finger-pointing. Unlike a capital -starved new company with an exciting innovation or novel product, California is a bureaucratic monstrosity with dwindling market share and an incompetent management team.

Even after the"compromise" hammered out this summer, California's budget remains structurally out of balance for the next several years, while current and future spending is being financed with illegitimate taxes and illegal borrowing. California taxpayers have little to celebrate as a result of the compromise.

The decision to enter the budget compromise marks a significant victory insofar as the spend-happy legislature was prevented from raising taxes yet again. But in fact, the 16 Republicans in the Legislature who voted for this structured settlement have, in a sense, embraced the worst of both worlds. Not only have they agreed to rob Peter in order to pay Paul -- they have the audacity to ask Paul to lend them the money to repay Peter.

The only way to achieve fiscal equilibrium is to increase revenues while simultaneously reducing public-sector overhead. This isn't a license to raise taxes -- rather, it requires creating more taxpayers. In other words, it calls for a tax cut. Lowering the tax rate on capital, capital equipment and capital supplies would energize economic growth and widen the tax base from which California's government could accumulate more revenues. Does it work? Yes -- as amply demonstrated in the 1930's, 60's, 80's and late 90's.

And other tax cuts are needed, as well. A Milken Institute study, "Manufacturing Matters," demonstrated that exempting manufacturing equipment from the 5 cent sales tax would result in an average of 50,000 new jobs per year over the next 10 years -- 14,000 of which are in the manufacturing sector. And the stimulus effect of a 5-cent sales tax reduction grows total state tax revenues by an average of nearly $50 million per year for the next ten years.

Would such tax cuts be sufficient to solve California's fiscal problems? Not immediately -- and that is why it must be done in coordination with structural reorganization of all state and local government programs, systems, departments and services.

As part of its reorganization efforts, the legislature should re-examine every area of the state government and weed out the waste, fraud and abuse. We know there is at least $2.5 billion in fraud in the Medi-Cal system -- given that Medi-Cal insiders have reported that the system, which costs California taxpayers $25 billion each year, has a fraud rate of 10% or more.
There are other recommendations from the American Legislative Exchange Council that should be implemented as well:

a. Re-negotiation of labor contracts
b. Reduction of retirement costs
c. Spending frozen to the prior year's level
d. COLA's frozen
e. Adoption of market-based, consumer choice Medicaid reform
f. Sale or lease of government assets and enterprises
g. Establishment of a privatization committee

Republicans need not expect any help from the Democrats in getting these reforms implemented. After all, just as bears love honey, tax and spenders love their slice of government cheese. But taxpayers have spent the past 5 years financing the systematic looting of California by the Democratic Party that dominates Sacramento. And they deserve a change in management.

The taxpayers are ready for change. What remains to be seen is whether Republicans areready to make the case that will earn them the trust of long-abused, taxpaying Californians.

Joe Armendariz is Executive Director of the Santa Barbara Industrial Association and the Santa Barbara County Taxpayers Association.