Budget Resources are Limited—Even in California
Compared to their counterparts in other states, California political and thought leaders seem much less concerned about wasteful government spending. While there are explanations, these aren’t excuses: California state and local governments need to adjust to the reality of resource limitations.
Supermajority control by the party less concerned with fiscal discipline is an obvious driver, but there is another, more subtle cause. Parts of the California economy have generated so much wealth that we often operate under the illusion of superabundance. There is so much property value and income available to tax, it seems that enough resources are available to address a whole spectrum of priorities, and to do so without having to worry about efficiency or cost-effectiveness.
Historically, aerospace, semiconductors, and entertainment have produced enormous wealth. Today, internet technologies and artificial intelligence are the main money-spinners. Silicon Valley now has five companies worth more than $1 trillion each.
These and other highly profitable firms generate copious corporate tax revenue, and their well-compensated employees pay large amounts of capital gains and personal income taxes. They also drive housing demand thereby increasing property values well above national norms and showering local governments with property tax revenues.
The sense of limitless fiscal possibilities was abetted by ultra-low interest rates after 2008 and a sharp increase in federal grants during COVID. Those two accelerants have now dissipated, and the state’s entertainment business is in recession. But California’s public policy discussion has yet to fully incorporate the language of resource scarcity.
The debate over high-speed rail is a great example. Proponents readily admit that progress has been too slow, and costs are too high, but they advocate plowing forward nonetheless for reasons divorced from economics. Among the rationales I’ve seen are the need to keep up with China, Japan, and European nations that have high-speed rail, the need for an alternative to flying and driving around the state, and the need to fight climate change.
I do not deny that these are reasonable concerns, and, if we could get a high-speed rail connection between Los Angeles and San Francisco for $5 billion or $10 billion, I would not oppose it. The problem that the proponents ignore is that the real cost would be far more, and indeed likely much more than the $128 billion upper bound estimate now quoted by the High-Speed Rail Authority.
The extra $100 billion (or more) has to come from somewhere, and that means less money for other government priorities and/or more tax revenue, whether it is collected now or in the future through debt service.
It’s fair to say no other state would undertake such a fiscally challenging (or dare I say, reckless, project). Texas has killed its own high-speed rail project, and Florida’s “higher-speed rail” initiative, Brightline, is private.
Another unique California ambition is free health care for illegal aliens regardless of age. No state has opened its Medicaid program to undocumented residents as wide as California has. We have 1.6 million undocumented Medi-Cal beneficiaries (4% of the population), whose coverage costs around $9.5 billion annually, exceeding the entire budgets of about ten other states.
Given the prevailing beliefs in the governing party that immigration laws should not be enforced and that health care should be available by right on demand, it seems that there is no inherent limit to officials’ willingness to fund this entitlement. Governor Newsom’s proposed restraints on illegal alien Medi-Cal might thus be seen as a speed bump on the road to fiscal insanity compelled only by the constitutional requirement to balance the state’s budget.
Those of us who studied economics in school know that it is intended to ask and answer the scarcity problem: the gap between our unlimited wants and limited means. An illusion of limitless revenue and a prevailing ideology that ignores the need to pay for government programs have put California at odds with economic reality.
Marc Joffe is President of the Contra Costa Taxpayers Association and a visiting fellow at California Policy Center.