Cross-posted on the California Majority Report.

It was overcast and dreary in Oakland today, and the dark clouds spread to Lake Merritt United Methodist Church during a budget crisis forum sponsored by Assemblymembers Loni Hancock (D-Berkeley) and Sandré Swanson (D-Oakland).

“I believe the drastic cuts proposed by the Governor would be devastating to the people I represent,” Hancock told the 100-person crowd. “The budget will define our values as a community.”

The budget as a statement of values was a theme repeated throughout the program. “We can have this conversation about numbers,” Swanson added. “But that kind of misses the point. This is really about values.”

Jean Ross, Executive Director of the California Budget Project, laid out what values are being put to the test in Governor Arnold Schwarzenegger’s budget:

• Confronting education — a $4.825 billion cut to K-12 schooling. That’s a reduction of $786 per student;
• Confronting health care — a $1.126 billion cut to Medi-Cal spending;
• Confronting crucial social services for children and families — a $463 million cut to CalWORKs programs. The largest share of these savings would come from removing aid for 150,000 children in low-income households; and
• Confronting crucial social services for the elderly and disabled — a $324 million cut to cost-of-living adjustments for cash assistance programs for low-income seniors and persons with disabilities in the SSI/SSP program.

To make matters worse, some of these cuts would take away federal matching funds. “What sense does that make?” Assemblymember Swanson pondered.

For more, including a discussion of the early release of prisoners, see over the flip…

As Assemblymember Hancock noted, California is the only state in the nation to both require a two-thirds vote in the legislature to raise taxes and grant the Governor line item veto authority. “This reminds me of the seven layers of Hercules,” Hancock said. “You have impossible barriers you need to cross before you get to the place you need to be, but if we don’t do that this year in California, we will find that this place is no longer the place it has been or we want it to be.”

Previous Schwarzenegger budgets in comparatively good economic times have relied on a combination of bonds, gimmicks, and already steep cuts. With a $14 billion budget shortfall this year, that will no longer be sufficient. Lenny Goldberg, Executive Director of the California Tax Reform Association, laid much of the blame on Governor Schwarzenegger’s revocation of the vehicle license fee and the Governor’s subsequent bonds to make up for lost revenue. Combined, these add up to $9 billion, nearly two-thirds of the budget deficit.

During previous deep red budget years, Republican governors Ronald Reagan and Pete Wilson combined a mixture of tax and fee increases and spending cuts to balance the budget. But this year, legislative Republicans and even our so-called post-partisan Governor have vowed to oppose all new fees and taxes. “The rational conversation on the tax side has been completely cut out,” Goldberg lamented.

On the issue of convincing Republican legislators to act more rationally in regards to tax and fee matters, Hancock and Swanson played good cop, bad cop.

Hancock emphasized that there are some genuinely rational legislative Republicans, even if their voting records suggest otherwise. She told the crowd that she has had Republican legislators approach her and say, “I know a really good tax loophole that you should cut. Of course, I can’t actually vote for it.”

Swanson was a bit less concilitary on the subject. “I can be just as irrational,” Swanson quipped. “I will not make cuts to Prop 98. I will not make cuts to after-school programs.” If Republicans insist on holding firm on revenues, Swanson made clear, then it’s up to Democrats to do the same on the services we care most about so we can finally have a “fair and rational” debate and make a genuine compromise.

Karen Hemphill, a Berkeley Unified School District Board Member, gave the best summary of why Democrats care so much about preserving education funding. The Governor’s proposal would take away revenue equivalent to a month in school for every school district in the state. That’s $768 less per child. At stake aren’t just pencils, textbooks or dodge balls. Education is the most important investment a state makes, she emphasized. Lower performing schools lead to lower performing students. Lower performing students will make less money on average, increasing their reliance on state services and decreasing their contribution to the tax pool. Lower performing students are also at a greater risk for falling into a life of crime, which of course ups the costs associated with courts and incarceration. “I don’t think many of us thought this was what was meant by the Year of Education,” Ross joked.

Hemphill also informed the audience that the district expects to lay off most of its counselors if the Governor’s budget moves forward. But she warned that Berkeley Unified School District is actually in better shape than most schools in the state, because Berkeley voters recently approved a parcel tax to help fund school programs.

The discussion on education costs frequently returned to the question of local government solvency. Assemblymember Swanson noted that much of the Governor’s budget simply shifts responsibility to the local level as an unfunded mandate. “It doesn’t go away; it just passes responsibility,” he said.

Alameda County Supervisor Keith Carson gave a sobering breakdown of statewide city and county concerns. 50% of Oakland’s revenue comes from federal and state money, but this includes property tax revenue collected by the city and transferred to the state. And local governments’ access to local property tax revenue has been on the decline. Less than 25% of the county’s budget is discretionary.

Naturally, as on the state level, the services provided with discretionary funds disproportionately harm those most in need of help. If the Governor has his way, the services that will be cut include things like preventative health care, educational opportunities programs, job training, rehabilitation programs, prison deferral services, and the like. While the state may see a short-term savings by destroying these programs, Carson made a crucial point that is frequently lost in the blustering anti-tax rhetoric that frequently permeates in Sacramento and among the chattering class. Simply put, in the long term, these programs improve society and save the state money. Preventative health care stops illnesses before they become a huge financial burden. Programs to broaden educational opportunities and to provide job training help the children of poor Californians become part of the well-educated, higher tax-paying, more flexible middle-class. Drug and alcohol rehabilitation and prison deferment programs reduce imprisonment costs, help reform broken lives, and ultimately generate more tax revenue for the state. Schwarzenegger “clearly didn’t have an understanding of how his budget proposal would impact local communities,” Carson explained.

The Governor’s budget also includes a $372 million cut to the Department of Corrections, mostly through the early release of 20,000 inmates and a quickening of the parole process for another 20,000. While this proposal has received bipartisan condemnation, many progressives will be inclined to support this part of the Governor’s budget, because there are far too many non-violent offenders in prison who simply don’t belong there, and because our country’s incarceration system all too frequently creates hardened criminals where there once was a good chance at rehabilitation. But the panelists cautioned that early release alone is insufficient.

As Ross explained, “I know many of you probably think that’s a good idea, but the problem is those individuals would not have supportive services in the community to help them find housing, help them find jobs, and help them restart their lives in a positive way.”

“It is irresponsible to [release prisoners early] without some funds to help the counties manage,” Swanson cautioned.

“Many of those individuals we would like to have in our community,” added Carson. “But they don’t have the supportive services necessary to assist them.”  

But there is reason for cautious optimism on this issue. Hancock thinks we have a real chance to turn the budget lemon into public safety reform lemonade by including rehabilitation block grants for local governments in conjunction with early release. This would still save the state money and provides a realistic opportunity to permanently reduce the population in our state’s overburdened prisons.

Clearly, Governor Schwarzenegger wasn’t the room’s favorite person, but there was some praise for the Governor, sort of. While previous budgets have relied on “smoke and mirrors,” Ross gave the Governor credit for presenting a more or less honest portrayal of what the budget would look like without additional revenue. “This budget makes clear that California is facing a very serious challenge,” she said.

And there was some good news to report too. Assembly Bill 32, California’s landmark global warming bill co-authored by Speaker Fabian Nunez (D-Los Angeles) and then-Assemblymember Fran Pavley (D-Agoura Hills), is not particularly threatened by the Governor’s budget, because the California Air Resources Board has limited authority to raise fees without legislative approval. Indeed, the state’s budget wonks are looking into redirecting money from the general fund that Governor Schwarzenegger reserved for AB 32, since that money could also be generated via a CARB fee hike.

So where do we go from here? How do we insure that our values are reflected in California’s budget this year? Goldberg had some suggestions:

• Tax oil producers. This would generate more than $1 billion yearly, and we are the only oil-producing state that doesn’t tax the oil producers;
• Bring back the vehicle license fee;
• Restore the top tax bracket that Governor Wilson abolished. This would generate $2 billion yearly, and those who faced the tax hike could even get a portion back in their federal tax returns;
• Institute a tax on goods purchased on the Internet;
• Find fees that can help relieve the general fund. Fees only require a majority vote, so they provide an opening for the Governor and legislative Democrats to increase state revenue without the support of legislative Republican obstructionists. He cited a carbon fee as one option;
• Organize parents, teachers, and concerned citizens in Republican districts to fight against cuts to education. Schools in Republican districts tend to be even more vulnerable to state cuts to education, and it’s possible the pressure could sway some legislative Republicans to take a more nuanced perspective on taxes;
• Get taxes on the ballot. While a legislature-approved tax initiative would also require a two-thirds vote, it is possible that enough Republicans could be persuaded to let the people decide their own financial fate; and
• Support groups that wish to independently carry revenue-generating initiatives. Even if a tax hike initiative can’t clear the legislature, we should expect signature gathering to begin from concerned interest groups.

So those are some of our options. Where are we likely heading? Said Goldberg, “My guess is one way or another, we’re going to be fighting this out on the ballot.”  

The country’s economy may be experiencing another stock market crash, and the housing bubble has been bursting, causing a housing market crash.  And this is all happening before the expected recession hits and causes unemployment to increase.  This is grim news indeed for state government budgets.

In particular California just experienced a sharp rise in unemployment.  Saturday’s San Francisco Chronicle reports, California’s jobless rate up sharply,

California’s employment market took a sharp turn for the worse in December, the strongest sign to date that the state’s economy might be falling into recession.

The same say the San Diego Union Tribune reported, State’s jobless rate tops 6 percent,

Despite relatively strong job growth, the unemployment rate in California jumped above 6 percent last month, prompting Gov. Arnold Schwarzenegger to speed up construction projects that would result in the hiring of 5,000 new workers.

According to the story, the Governor is speeding up state construction work to help soften the recession’s blow by providing jobs, which provide income to people who are likely to rapidly circulate those funds to stores and other parts of the state’s economy.

Let me repeat that: the Governor is speeding up state government construction work, because it helps the economy.   Shorter version: Government spending helps the economy.

So why does the Governor understand that this spending increase helps the state’s economy, but not understand that his 10% “across-the-board” spending cut will hurt the economy by cutting jobs and incomes at exactly the wrong time?

Obviously a cut in state spending is exactly the wrong thing to do at this time.  

How do we get out of this mess?  Part of the cause of the coming recession is a concentration of the country’s income and wealth into fewer and fewer hands at the top of the economic scale.  And at the same time that more and more of the income is going to fewer and fewer people, they are paying lower and lower tax rates.  War on Greed is asking for taxes to be increased on the “buyout industry.”  Their statement,

Buyout industry executives with multi-million dollar incomes have been exploiting a tax loophole that allows them to pay a lesser tax percentage rate than most of the workers in the companies they manage.  This is a disgrace!

Another example is hedge-fund managers have a tax loophole that lets them pay less in taxes than their maids.  See this video:

My previous post titled, Do taxes drive California’s economy? concluded by saying,

The prosperity we have experienced comes from public investment and that comes from taxes. Cutting spending is like eating our seed corn. It is taxes that drive the economy. Spending cuts hurt us. Borrowing hurts us. It is time for people and companies that are getting wealthy off of our public investment to pay us back.

Perhaps it is time to start getting some of the money from where the money went.  It is time to close tax loopholes, raise income taxes at the top, and raise corporate taxes.  These are the biggest beneficiaries of our government’s spending – it’s why they’re doing so well!

The Governor has continued to assert, and the people largely believe him, that he is somehow removed from the financial troubles that face the state.  And he got an assist from an unlikely source today – former Governor Gray Davis.

So why is California suddenly faced with a $14-billion budget shortfall? Is it because the governor (or the Legislature) did something terribly wrong?

No, the governor of a nation-size state like California can affect the economy, but only on its margins. The reason this deficit is looming is because no one can repeal the business cycle. Just as night follows day, expansionary times will be followed by recessionary times. And yet the overwhelming impulse in Sacramento is to spend every dollar on the table. If a booming economy has the state coffers flush, Democrats say: “There will never be a better time to expand programs than right now.” Republicans counter: “We have too much money. Let’s reduce taxes.” […]

Believe me, Gov. Arnold Schwarzenegger doesn’t want to close 48 parks, reduce education funding or release prisoners. Like all governors, however, he is required to bring expenditures in line with revenues. I don’t agree with all of his suggested cuts, nor do I endorse all of the critical responses from the Legislature.

There is a significant reform suggested by the governor, however, that I fully endorse. It is a constitutional amendment that would require putting aside a portion of surging revenues in good times as a buffer against painful cuts in bad times. I called for such a “rainy day” fund while in office — and recently former Gov. Pete Wilson also spoke in favor of this idea.

Gray Davis is showing the political acumen that made him the most reviled governor in recent California history.  He’s also being massively dishonest.  Schwarzenegger repealing the Vehicle License Fee’s return to 1998 levels had an undeniable impact.  Furthermore, so did his borrowing through bonds, which costs the state billions of dollars per year.

Are Arnold and the California GOP to blame for this? Who else? Nobody put a gun to their heads and forced them to respond to our last crisis with nothing but a toxic combination of demagoguery and tax-cut jihadism. They did it all on their own. I understand the desire to roll up our sleeves and stop sniping about the past, but let’s not actively rewrite history to pretend that our latest crisis “just happened.” It didn’t. Arnold and his party, despite plenty of warnings from nonpartisan budget analysts about what they were doing, deliberately bequeathed it to us.

And, contrary to Schwarzenegger’s belief, he has a great deal of control over state spending, including a line-item veto.  Trying to fault the legislature for “runaway spending” when he has to sign the document is just completely absurd.  The legislature didn’t go on a “spending spree” on its own, nor did they use revenue only for the purpose of spending; there were billions in tax cuts thrown in as well.

The Governor, and his predecessor, are writing a history of government in California that doesn’t have an executive branch.  This is a falsehood that can only be met with laughter.

By Dave Johnson, from Speak Out California

California faces a large budget deficit, and the Governor has declared an emergency.  The Governor has proposed “across-the-board” spending cuts — which means cutting all state services by an equal amount.  

This inability to prioritize the importance of any particular spending cuts should be taken as a de facto declaration that there is no waste or unimportant spending left to cut — that all spending is equally crucial.  Driving home this point, the Governor is asking for the release onto the streets of prisoners.  

If we don’t want prisoners released onto our streets the legislature must raise revenue.

The first place to look is toward taxes and fees that were cut when times were good.  The vehicle license fee is the most obvious place to start.  A letter-writer in today’s San Francisco Chronicle makes this point:

“When Arnold Schwarzenegger became governor, he immediately repealed the increase in vehicle registration fee that Gov. Gray Davis had used to help close the budget gap. This returned money to the pockets of Californians with cars (I received a check for $1) and took $4 billion from our state’s budget. This is roughly the amount he now wants to cut from our public education. … It is hard for me to feel empathy for people who complain about a 1.5 percent tax increase on their $100,000 car when there are families that will lose their ability to have a home if these cuts go through.”

We should examine the record from past tax cuts.  Have they helped or harmed us?

The record shows that tax cuts actually harm state economies and finances.  The Center on Budget and Policy Priorities, in a 2005 report titled, TAX CUTS AND CONSEQUENCES: The States That Cut Taxes the Most During the 1990s Have Suffered Lately found that tax-cutting states actually performed worse fiscally and economically than other states.  From the sumary:

Those big tax cuts do not seem to have contributed to state fiscal and economic health.  In fact, when the economy began to weaken in 2001 and states fell into a fiscal crisis, those big tax-cutting states generally faced larger fiscal problems, and had worse economic performance, than other states that had been more cautious about tax cuts.

Since these cuts were clearly a bad idea it is time to repeal them.

Click to continue

(Promoted due to database problems. This post originally appeared at Speak Out California – promoted by Brian Leubitz)

California is said to be having a budget “crisis.”  Last week the Governor signed an emergency proclamation forcing the legislature to meet and act on the budget within forty-five days.

“Crisis” and “emergency” are serious words, and the public is upset about hearing them.  This is, of course, the intent of those using the words — to get the public upset and demanding action.  When people are shocked and worried they will accept solutions that might not be what they would accept if they had time to think, consider all reasonable alternatives and weigh all the consequences.  In an “emergency” the public just wants the problem solved.  (This is a  “Shock Doctrine” approach.)

So having created a crisis atmosphere the Governor is asking for “across the board” cuts in state government spending.  This is a tactic that let’s him avoid specifying any particular cuts.  The reason the Governor does not want to specify any particular spending cuts is because people will realize that such cuts are not a good idea.  

Asking for cuts “across the board” sounds so fair.   But not specifying also means not prioritizing.  By setting no priorities for spending cuts the Governor is saying that one area of spending matters to him no more than another.

Let’s be clear about what the Governor is doing.  He is cutting police and other law enforcement and public safety.  He is cutting schools — when California already is 43rd in spending per pupil.  He is letting prisoners out onto the streets.  He is cutting disaster assistance.  He is letting roads and bridges deteriorate.  That is what government spending is — and we are who it is for.

Each and every thing the Governor is asking to cut is important to all of us, the people of California.  We, the people need and want what the state spends its money on.  We need our police and public safety departments.  We want our children educated in good schools.  It is rare to find a person who claims that the state “spends too much” who can tell you just what we, the people of the state actually spend our money on.  (Try it yourself – see if you can get specifics from anyone who claims that the state spends “too much.”)  That is why the Governor is calling for “across-the-board” spending cuts and not specifying where he thinks cuts should be made.

Meanwhile the Governor is not presenting the public with alternatives to spending cuts.  There ARE alternatives, but they are only going to be part of the process if people pay attention to what is going on.  Here are just a few examples of alternatives that should be considered:

Alternative: Restore the vehicle license fee.  This would bring back $5 billion that we, the people should be collecting and using.

Alternative: Tax oil as it is taken out of the ground.  The oil belongs to the people of California but we don’t ask companies to pay us when they pump it.  A California oil-severance tax would go a long way toward helping solve our budget problems.  Alaska, for example, has no income tax, and in fact the state instead sends a check to citizens each year because they understand that the oil is a common resource and tax the companies that pump it out of the ground.  

Alternative: Impose a surtax on upper incomes to balance the budget and pay off the bonds.  Consider that the reason some people receive so much more income is because the infrastructure we Californians have built and the benefits that we the taxpayers have granted to corporations helps build prosperity.  And one effect of having very high incomes is that they have large amounts of disposable income with which to pay taxes and still have plenty left over.  This money can also be used to pay off the bonds that the Governor has issued to avoid making touch choices in the past.  Currently we pay approx. $4 billion each year toward interest on these bonds.  Paying down these bonds and reduces these interest payments and THAT is a spending cut we all want to happen.

Click to continue.

“Budget Nun” Elizabeth Hill’s pessimistic report about Governor Schwarzenegger’s budget stressed the need for more revenue to close the $14 billion dollar gap and maintain a professional level of services.  But if the money boys on Wall Street are to be believed, even that $14 billion dollar shortfall represents a number borne of outsized optimism.

Deep spending cuts proposed by Gov. Arnold Schwarzenegger last week were followed yesterday by more bad news – a Wall Street firm placed the state’s bond rating on “negative watch” amid fear that a $14.5 billion budget shortfall could get bigger.

The governor’s budget is based on data from November and early December that assumes tax revenue will grow 2 percent next year. But in recent weeks, some economists have begun to warn that the economy may slide into a recession, which would shrink tax revenue and widen the budget gap.

Fitch Ratings placed California’s bond rating of “A+,” already one of the lowest ratings of any state, on “negative watch” because of lawmakers’ inability to close a chronic budget gap and revenue forecasts in the governor’s budget that may be outdated.

By the way, the bond rating becomes slightly more important when you finance the government by, you know, floating bonds.  Boy, do we ever need a governor with a strong fiscal background to ensure our bond rating doesn’t go to crap!  Where d’you think we should get one of them?  Do we need another recall?

(over)

What choice did I have but to reach for the phone and dial three ringleaders from the 2003 recall of Davis? […]

Ted Costa, the anti-tax crusader and the man who drafted the Davis recall petition, was on the horn right away.

“We’ve got to get it going again,” I told him.

Costa seemed confused.

The recall, I said. The recall.

All the same conditions are there again, I told Costa, and there has to be another “throw the bum out” campaign.

“There probably should be,” Costa agreed, warming to the idea.

(that article is hilarious.)

The point is that if you have to use creative accounting just to get to a $14 BILLION dollar loss, something is fundamentally wrong.  And cutting spending is not going to produce a satisfactory solution.  For one, it will result in forfeiting $1.5 billion dollars in federal matching funds, doubling the real-world impact on Californians.  For another, it will not make up for shrinking revenues that will necessitate more cuts, and on and on.  I know that the Governor, and really the whole Legislature too, has a speech impediment where the word tax comes out sounding like the word fee.  But fixing the revenue side is unavoidable, and Sacramento is not a movie set.  Welcome to reality, Governor.

Last month I took the LA Times to task for framing the current budget deficit as a spending problem, and wondered why nobody at the paper seemed interested in focusing on the fact that what California has had for decades is a structural, deliberate revenue shortage.

David Lazarus has taken up the challenge. In today’s column he says what many of us have been arguing for many, many years: Prop 13 must go.

It’s pretty simple, though. Either we spend less money or we raise revenue, or both.

All things considered, our friends in Sacramento aren’t going to suddenly discover the value of frugality — unless packed schoolrooms, broken bridges and crumbling levees are your idea of satisfactory quality of life.

So that means we need to get our hands on some extra cash. And like it or not, that means taxes. That’s a bad word, I know. But it’s how things work in the real world.

Proposition 13 is as good a place as any to start if we want to raise some serious coin and we want to do it soon.

“It’s terrible economics,” said Lenny Goldberg, executive director of the California Tax Reform Assn. “We have the heaviest tax on new investment and no tax on windfall.”

What he means is that Proposition 13 allows the state to reach deep into the pockets of people and businesses that buy property at market value. But it does precious little to get a piece of the action from those with long-held properties that have soared in value over the years.

Amen.

Lazarus does a good job of explaining some of Prop 13’s basic unfairness while also proposing some fixes that avoid hitting elderly and working-class Californians with unaffordable tax bills.

One proposal, which the California Tax Reform Association has already discussed, is to again assess ALL commercial property at market values, instead of giving them the same protections Prop 13 gives to residential property:

Assessing all commercial property at market values could add $5 billion more to state coffers, Goldberg estimated.

“The assessment of commercial property is the biggest hole in the state’s tax system,” he said. “It’s completely indefensible.”…

If the older portions of the Disneyland resort were assessed at the same level as newer ones, he observed, Orange County would be raking in millions of dollars more each year in revenue. This, in turn, would make the county less reliant on assistance from the state.

“It’s only fair,” Goldberg said.

Not only is it fair, but it’s fitting. This WHOLE tax and budget mess got its start not with Prop 13, but with the little-known AB 80, enacted way back in 1967. AB 80 was the Prop 13 of the commercial real estate market, limiting dramatically the ability of local government to use commercial property to pay for its services.

This began the cascading effect that brought us to Prop 13 and, ultimately, to the present crisis. Many California cities had artificially low residential property taxes in the ’50s and ’60s, using higher assessments on commercial property to fund services. When AB 80 disallowed that, the residential rates had to rise. The inflation of the 1970s saw the cost of providing services soar, and that had to come from higher residential property taxes. However, many homeowners had come to see the low taxes of the ’50s and ’60s as a kind of birthright. And so California in the 1970s was consumed by a series of property tax battles, especially at the local level. Prop 13 was the right-wing’s endgame, designed to radically settle the issue in favor of a small group of homeowners at the expense of state government and future buyers.

Even though commercial property values have already begun and will continue to fall along with the collapse of residential values, there is hardly any viable scenario that sees commercial property returning 1980 levels. In fact, at the moment, even the pessimists see real estate returning to 1998-2000 levels, maybe 1994 (the previous bottom) at worst. Assessing commercial properties at fair market value would still capture billions in new revenue even in a recession.

The Cal Tax Reform Association has a number of similar proposals that they claim can raise $17 billion, even without a direct frontal assault on Prop 13. I’ve mentioned their proposals before and will do so again later this week – it’s time we put them at the center of the conversation in California.

But on a deeper level, David Lazarus has begun a discussion that is 30 years overdue. Even if the discussion isn’t easy. Whenever anyone even mentions tweaking Prop 13, people tend to freak out – even at Daily Kos, so-called liberal Democrats in California attacked yours truly for daring mention Prop 13 reform.

The problem is that not enough Californians yet see how Prop 13 works against their interest. The savings on the property tax bill isn’t worth the lack of health care, the inaccessibility of education, and the decaying infrastructure that is starting to cripple our economy. Prop 13’s effect was to create a homeowner aristocracy in this state, where a lucky few who bought homes before, say, 1985 are able to withstand better the economic storms lashing the state, while the rest of us suffer to maintain their privilege.

Lazarus’ column was sparked by an LA Times report that Arnold planned to assess a “fee” on homeowner insurance policies to pay for fire protection. As Lazarus so aptly puts it:

A surcharge on insurance that’s based on a property’s replacement cost, and hence much of its market value. That may not be an honest-to-goodness property tax increase, but it’s about as close as you can come without getting your hair mussed.

It’s too much to hope that Arnold instinctively understands the problem of Prop 13, and in fact he has positioned himself as one of the staunchest defenders of it and its legacy. But as I explained back in October, much to the OC Register’s chagrin, the lack of fire protection is a direct consequence of anti-tax activism. If Arnold is willing to raise revenues for firefighting, he is implicitly opening a door that the rest of us should run through.

Right on, David Lazarus, for reminding us that we’re never going to get out of this budget crisis until we revisit Prop 13. At least someone at the Times gets it!

This post originally appeared at Speak Out California.

Do taxes drive California’s economy?

The governor says California is in a budget crisis.  He says we need to cut the state’s spending “across-the-board,” and the Republicans insist that tax increases and other alternatives are off the table.  The media largely seem to be going along with taking discussion of alternatives off the table, and consequently Democrats are too intimidated to bring them up.

But what they are missing is that taxes drive the economy.

Tax-cut proponents say that increasing taxes on the wealthy “takes money out of the economy.”  I wonder where they think the money goes?  Do they think it just goes up into the air and disappears?  

They don’t seem to — or pretend not to — understand that taxes come right back into the economy. It is taxes that pay the salaries of teachers and police officers and that build and maintain our roads.  Then that money circulates from those teachers and construction workers to support our stores and movie theaters and restaurants and to buy homes and cars.  

What would the effect be of a cut?  In California there are approx. 308,000 teachers.  The Governor is proposing a 10% “across-the-board” tax cut.  Imagine the economic consequences if this cut means laying off 10% of those teachers — 30,000 people? This is not the precise plan but it illustrates that spending cuts do not help the economy of California.  In fact it is spending cuts, not tax cuts that “take money out of the economy.”  

And anyway we want what our taxes buy us!  We want our teachers and firefighters and roads and courts and water & sewer systems.  Cuts are not what we want.

Borrowing more money is not the solution, either.  One result of the conservative tax-cutting fever of recent years has been massive borrowing at the state and especially the federal level.  But people have not been told that borrowing is in reality a spending increase because we have to pay interest on that debt.  California is spending $4 billion this year to pay interest on bonds and that is spending that cannot be cut.  That is a lot of spending, and we would not have such a serious deficit if we did not have to pay out that $4 billion.

So the solution to the budget shortfall has to include all the tools in our toolbox.  First, we have to close tax loopholes.  We need to restore the vehicle license fee (which the Governor calls a tax).  Then we need an oil-severance tax – we are the only state in the country that drills oil that doesn’t have one!  And we have to stop being a “donor state” to the federal government.  We send over $50 billion to the feds that we do not get back for programs or services.

Finally, we need tax increases on corporate profits and the wealthy.  Here is why: tax money is used to build the very things that ensure our prosperity.  It is used to build the economy that enables some of us to become very wealthy and stay that way.  Our tax-supported legal system enables and protects businesses and investors.  Our tax-supported economic infrastructure defines and regulates the financial system under which investment occurs to build these businesses. Taxes built the physical infrastructure (like schools and roads) that helps us all in ways that everyone understands.  But taxes also built and support the legal and economic infrastructure that is crucial for economic growth as well.  The Anderson Forecast states that the two keys to a successful economy are infrastructure and education, and that is tax dollars.  Entrepreneurs and businesses look for those qualities when determining where to set up shop.

In other words, the wealthy and businesses have benefitted the most from government investment and they have the most money as a result, so they should be contributing the most.  And middle-class taxpayers are currently being hammered by a different kind of oil tax — huge increases in gas prices at the pump while the oil companies are recording the most profits by any companies ever.  And because of previous spending cuts, the middle class, and particularly our students, are experiencing increases in fees such as college tuition while the benefits of the taxes they pay are going disproportionately to the wealthy.

Of course taxing the very wealthy and corporations might very well take some money out of the Cayman Islands’ or other tax-haven economies, bringing it back to California. (One building in the Cayman Islands is the business address of more than a thousand American corporations.)  And increasing taxes on the wealthiest might even cause someone to have to buy a slightly smaller yacht or private jet in order to be used to pay a few hundred teachers or firefighters.

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Tomorrow, Arnold Schwarzenegger, reminded that he’s the governor of California and not the governor of Time and Newsweek, will walk up to a dais in Sacramento and claim that now, four years after he was elected to enact reform, the time has come to reform the budget process.  But it’s a curious use of the term “reform,” since it will be an attempt to resurrect a policy that was soundly defeated by voters in 2005.

Heading into a week in which he’s expected to deliver grim news about the state’s fiscal health, Gov. Arnold Schwarzenegger is also preparing to propose changes to the budgeting process.

The Republican governor will offer a “budget reform” plan when he outlines his goals in his State of the State address Tuesday. Such a proposal, if successful, would likely give the executive office more authority in making cuts even after the Legislature has passed an annual spending plan.

First of all, California already gives the governor the ability, through the line-item veto, to make plenty of spending cuts.  Schwarzenegger oughta know, he used it to terminate mentally ill homeless people from getting treatment.  What Arnold really wants to do is something that Pete Wilson was denied as far back as 1992.  He wants to be able to subvert the will of the voters through Prop. 98 (so much for “let the people decide”) and eliminate spending baselines for education, health care, and other government services.  This is nothing but a wank, an effort to eliminate the revenue side of the budget equation and solely solve a $14 billion dollar problem with deep spending cuts.  He’s also trying to essentially defund education right at the beginning of the already-D.O.A. “Year of Education”.

What this will also do is shield Schwarzenegger’s corporate buddies, who finance all of his travel, from the possibility of actually having to pay their fair share for access to the California market.

Considering that this is the third time Schwarzenegger has sought the ability to defund education and health care, I don’t know how you can see his legacy as anything but that.  This has been the very public agenda from day one.  Everything else is window dressing.  Let’s hope the Legislature understands that, even if the media doesn’t.