California, the eighth largest economy in the world, is in crisis. Not only because of the general economic downturn, although that plays a role. No, California’s crisis is in part self-inflicted. The state has been without a budget since October 1. Why? Because of the rigidity of the positions in the state legislature.
Meanwhile, the state’s bond rating has been lowered to junk status. The unemployment rate is approaching 10%, severely affecting revenue from state income taxes, and the unemployment insurance fund is broke. One in every 25 homes in the state is in foreclosure. Home values have plummeted 50% and more in some areas, putting a further crunch on the revenues coming from property taxes, Housing construction has ground to a halt. Tax refunds have been suspended in favor of IOUs. Consumer demand has dried up, affecting the revenue stream from sales taxes. Public works projects — yes, infrastructure jobs — are being halted, adding to the ranks of the unemployed. Our roads and levees are in need of critical repairs. Over the weekend, the legislature tried to bridge the $40 billion shortfall with a combination of reduced spending, temporary increased taxes, and borrowing. The reduced spending will hit hard. Education will be particularly hard hit, as will Medical (California’s Medicade program). But after a 30-hour marathon session, the budget came up one vote short. One Republican vote. One vote from the minority party, in the State Senate. Sound familiar?
The state has cut back on hours for most offices and imposed mandatory furloughs two days a month to trim expenses while the budget battle continues. School districts are facing hard choices — laying off staff, closing schools, cutting services. Today, layoff notices will be sent out. Ten thousand today, going toward twenty thousand. And public works projects, including ones in process, will be canceled–even though there will be additional costs incurred in canceling them. Not surprisingly, our governor is one of the GOP governors who support the stimulus plan. As I pointed out in a recent post, California sends more money to Washington that it gets back. And California can cover only $6 of every $10 that is obligated.
Some thirty years ago the infamous Proposition 13 was passed by California voters. Sold as a benefit to tenants by apartment building owners, it essentially freezes assessed valuations of property for tax purposes until the property is sold. The result is a wildly skewed system. People who’ve owned a piece of property since before the initiative’s passage are essentially paying property taxes on the value of the property a generation ago. So, the taxes on the house I sold in 1990 quadrupled at that point. A family member whose home is worth at least twice that of my current home pays just over 10% of my property tax burden. And despite the fact that my own home has lost value to below its original purchase price six years ago, this year’s tax bill was higher than last year’s.
The leadership of both parties in both houses of the legislature say that the proposed package makes the best of a bad situation. Both sides give up some things to get other things they want. But apparently that isn’t good enough for some members–Republicans who have taken a no-tax pledge. Compromise isn’t a part of their vocabulary. Nobody wants to have to pay higher taxes, especially in the face of a serious recession. But there are constitutional requirements that place restrictions on budget deficits as well as on tax levies without voter approval. There are several senate Republicans who have decided that it’s better (at least for them politically) to continue their no-tax pledge. Their leadership has told them they’re simply not going to get a better deal — that the proposal on the table is the best way to solve the crisis. But, rather than recognizing the dire straights in which California finds itself, accepting reality isn’t acceptable. They prefer engaging in a state-wide game of chicken.
