Yes, California, There's Still A Budget Mess To Fix

I STILL haven't had a moment to process the still-brewing outcome of Election 2008 here in California, but there's not much time to savor or despair about the results. A new session of the Legislature has been called, and Arnold is starting off by calling for a tax increase:

Gov. Arnold Schwarzenegger called today for a temporary 1.5-cent increase in the state sales tax to help close an $11.2 billion deficit in the state budget, as well as new taxes on liquor and oil production.

Schwarzenegger also proposed one-day-a-month unpaid furloughs for state workers for the next 17 months, as well as rescinding two of the workers' 13 paid holidays.

There are also massive spending cuts planned, $4.5 billion in all, including $2.5 billion on primary school education. This is all happening because we have a short-term deficit of maybe $10 billion dollars, with an additional $13 billion dollar shortfall estimated for next year. In all, by the middle of 2010, the projections are that we will be $24 billion in the hole.

This proposal is completely and utterly insufficient to deal with that. A sales tax increase is regressive and there's no way around that. Part of the proposal to extend the sales tax to services like "appliance and furniture repair, vehicle repair, golf fees, veterinarian services, amusement parks and sporting events," according to the LA Times, and this is part of Karen Bass' restructuring of the revenue side. And an oil extraction fee is deeply needed. We're the only oil-producing state in the country that does not charge oil companies to take our natural resources.

But the cuts are pretty cruel. And education isn't the only thing on the chopping block. The Governor wants to eliminate dental insurance through MediCal for poor Californians, cut welfare subsidies, and reduce services for the elderly, blind and disabled. Hey, they don't have lobbyists, right? And this proposal somehow snuck into the package:

• Relaxing some state labor regulations dealing with meal and rest periods, overtime exemptions and work schedules.

Hey, it wouldn't be a Republican plan if there wasn't some giveaway for business.

There is no question that the state's finances are in the worst shape since the Great Depression. But those Californians doing well have shown, as Robert notes today, a desire to pay for those services that can make this a great state. It's aberrant for people who are wealthy to pull up the drawbridge and have no concern for the least of society. Their continued economic good fortune depends on the stability and security of all citizens, as a rising tide lifts all boats. We have been in a constant state of economic crisis for going on eight years because nobody will admit what needs to be done - to have a revenue structure that doesn't reflect the boom-and-bust cycles of the greater economy.

A couple of the things that Schwarzenegger is doing make sense. He is calling for a 90-day moratorium on foreclosures so lenders can work out loan modifications with borrowers, something President-Elect Obama has already proposed and which will improve our economy (a foreclosure costs something like $250,000 a piece to the economy). And his proposal would speed public works programs as a kind of statewide stimulus package. But the very first thing that can be done is to reinstute the automatic VLF increase that Arnold cut and is now scrambling to cover, which would cost the equivalent of $12 a month for most Californians. But Robert Lehman at SEIU has outlined a new progressive version of the VLF that I think would increase revenue and help protect the climate.

Dedicated Revenues. VLF revenues, based on up to 0.65% of vehicle market value, are dedicated (CA Constitution Article 11, Sec. 15, implemented by Proposition 47 in 1986) to cities and counties; some additional VLF revenues above 0.65% may also be partly dedicated to cities and counties, depending on current statutes. It is unclear whether additional revenues from a vehicle GHG-emission-based component of the fee, rather than the vehicle market value, might be obligated to cities and counties. GHG component revenues should be made available for other dedicated purposes, such as improving State transportation GHG emissions through R&D, energy infrastructure improvements, transportation equipment subsidies or incentives, etc.

Progressivity. The VLF is currently based on a flat 0.65% rate applied to the current estimated market value of the registered vehicle. Owners of newer and more expensive vehicles with higher current market values pay higher level fees, while owners of older and less expensive vehicles pay less. People without vehicles who use mass transit, bicycles, or other forms of transportation do not pay the fee. The 2003 reduction of the VLF heavily benefited Gov. Schwarzenegger for example, with his ostentatious fleet of Hummers, while mass transit riders did not benefit at all.

With this flat fee structure, the VLF still absorbs a larger share of low-income vehicle owners’ household income than it does for upper income Californians; the VLF’s moderate regressivity is similar to that of the sales tax in terms of its relative burden on the lowest income quintile compared to the upper quintile (see UCB Incidence paper below, and CBP, “Options for Balancing the Budget: Reinstating the Vehicle License Fee,” 5/8/02, p.2). A more progressive alternative exists. Rather than assessing the fee on the full value of the vehicle as California has done, Virginia exempts the first $5,000 of vehicle value, making the fee more progressive. With a $5,000 exemption, for example, an estimated one third of California vehicles would be exempt from the VLF and owners of slightly higher value vehicles would pay significantly less. The exempt value could be adjusted over time. A restored VLF should initially be based on vehicle value, with a significant deductible amount from this value, and a rate probably set above 2% to compensate for lost revenue.

This is a smart idea and should be the first counterpoint that the state Democrats propose. At some point we must start raising revenue sensibly. Furthermore, doing anything before December 1, when a net of 2 new Democrats in the Assembly and possibly 1 new Democrat in the Senate join the team in Sacramento, would be ridiculous.