“California running out of money”
“Because California does have a perennial budget crisis, it’s very easy to fall into the ‘boy who cried wolf’ syndrome,” says Dan Schnur, director of the Jesse M. Unruh Institute of Politics at the University of Southern California. “This time the sky is really falling.”
The state faces a $28 billion budget shortfall over the next two years. If nothing is done, nearly $5 billion in public-works projects could be halted in little more than a week for lack of bond sales – everything from bridge replacements to a new highway tunnel and billions of dollars’ worth of school construction, according to state Treasurer Bill Lockyer.
Already, the state failed to attract enough buyers three weeks ago to sell all of the bonds it had floated, he told state lawmakers Monday. “Expecting investors to purchase our bonds now, when we can’t agree on a budget that lenders can rely on, is like expecting someone to buy a stock when they know it’s losing value,” said Mr. Lockyer.
He and three other state finance officials testified Monday in a rare joint session of the legislature.
The picture worsens next spring if legislators don’t pass some plan to increase revenues or cut spending or both. California will run out of operating cash in March, state controller John Chiang told the lawmakers. The recession has severely squeezed state tax revenues.
Normally, the state would borrow to cover any shortfall. But internal revenue sources have already been depleted and outside lenders are less accommodating.
“It’s not because of [California’s] economy, because it’s deep and diverse,” says David Hitchcock, primary credit analyst for California with Standard & Poor’s. “It’s because, financially, they’ve had budgets that have not proved realistic. They’ve had large deficits and they’ve only been able to pay for their budgets through borrowing for the last couple years.”
California needs to learn there is no such thing as a free lunch, if you want all those government programs and spending, you have to pay for it. Raise taxes or cut spends, or both. But living in a dream world where you can have relatively low income and sales taxes with massive government spending doesn’t balance out.
Bringing the budget back in line will require drastic cuts, significant tax raises, or both. Those options will harm the economy in the short run and cost the state jobs – but so would any delay in taking action, said legislative analyst Mac Taylor.
If I were in Arnold’s shoes, I’d just let the dems jack personal income rates. If you really want to convert a bunch of moderate Democrats to Republicans, jack their taxes up. The tax increases would have to be very high –
In earlier drafts of the budget, majority Democrats presented plans that called for as much as $11 billion in added revenues. Tuesday’s proposals amount to $8.2 billion, plus another $1.5 billion from a proposed tax amnesty plan.
Democrats have proposed before — a 2005 move failed to receive a single GOP vote — the creation of 10 percent and 11 percent tax brackets for high earners. The highest tax bracket now is 9.3 percent.
The plan unveiled Tuesday would impose a 10 percent rate on the portion of couples’ incomes above $321,000 a year and an 11 percent rate on the portion of income above $642,000.
It would raise about $5.6 billion a year.
Big business would lose its net operating loss deduction for three years, bringing the state another $1.1 billion, according to the Senate plan. And the plan would restore the franchise tax rate for businesses from 8.4 percent to 9.3 percent, raising $470 million.
The state currently faces a shortfall of about 30 billion of a 103 billion budget which includes very large debt payments. The 5.6 billion estimate from July is now lower due to falling incomes. Why not jack the 9.3% top rate up to around 20%? That should net about 30 billion in new revenue for a little while, until it starts killing investment. Problem solved, until next time.