Unraveling California’s New “Fiscal Paradox”

Unraveling California’s New “Fiscal Paradox”

California taxpayers are getting taken to the cleaners, but most of them are completely in the dark about how and why.

I will pose a quick question:  Does it seem strange that California has recorded record revenue increases, yet we also see a record number of tax increases and bond issuances on the ballot?

In other words, the state’s tax system is collecting massive amounts of revenues, record amounts, yet politicians are still asking for a record number of new tax increases.  For taxpayer advocates, it just doesn’t seem fair and seems very strange at first glance as to how this can even occur.

The truth of the matter is that California’s system of public finance is a complete train wreck and is set up such that no amount of tax revenues collected will ever be enough to satisfy “spending needs.”   The so-called baseline expenditure increases are on autopilot and deficit projections are generated despite record revenue increases, a trend projected in the Governor’s May Revise. 

In May, Governor Brown’s office said that state tax revenues were surging but projected significant future deficits in the near future, particularly in the event that the Prop. 30 tax extensions are not approved by voters.

A closer look at the state’s independent audit reports note that total state tax revenues have increased from $185.2 billion in 2012 to $250 billion in 2015—a $64.8 billion or 35% increase!  Total state, expenditures have increased from $195.6 billion in 2012 to $248.4 billion in 2015—a $52.8 billion or 27% increase. (Note:  Revenue growth is coming in equally as strong for 2016 if not even stronger, such as in the case of property tax revenues)

Prop. 98 education spending alone has jumped from $47 billion in 2011-12 to $72 billion in 2016-17—a 52% increase in education spending in only five years despite very nominal public school enrollment growth.


Prop. 98 spending has increased by 52% since 2011, and yet more tax revenue is needed?


Despite this huge windfall of roughly $65 billion in annual state revenue increases for 2015, over 2012—state Democrat politicians and the public employee unions are still telling us that we need a massive tax increase, namely Prop. 55, to avoid education budget cuts.

To put it simply, the state budget has received a $65 billion annual windfall since 2012, so why do the tax and spend interests so badly need to extend an $8 billion a year tax increase?

Don’t be fooled.  Prop. 55 and the “need” for additional taxes is a complete sham set up by California’s unaccountable and automated system of budgeting that ramps up state spending regardless of need and past budget windfalls. (Note: Similar trends are seen at the local level)

The primary culprit is Prop. 98 which requires that 55% of new revenues to be allocated to Prop. 98 education programs regardless of need or other priorities.  And then this spending is locked in, meaning that if revenues drop the following year, you effectively run up a deficit to Prop. 98 programs even though they just received a massive windfall in the preceding year or years.

The result is a ratchet effect on state spending, where it can only go up, never down, and any declines must be paid back in full regardless of any accountability mechanisms or other needs.  The only solutions to mitigate the problem would be to either provide Prop. 98 with nothing more than the minimum guarantee each year, or just suspend it every year into perpetuity, assuming an outright repeal cannot be achieved.

The state’s pension problem, particularly at the local level, is another major factor which has dramatically increased the cost of government, led to the crowding out of government services, and helped bolster the false narrative that somehow government needs more money because service levels are declining dramatically.

Much of the tax windfalls were also committed to other ongoing programs such as a doubling in Medi-Cal enrollment, increases in the cost of government from contract negotiations, and unmitigated pubic employee benefit cost increases, particularly retirement and health care.

Perhaps the most unfortunate thing is that over this same period of extraordinary revenue growth the state has failed to both invest infrastructure and curb the state’s addiction to skyrocketing debt which has recently increased to over $400 billion in 2016 for the State of California alone, according to the San Francisco Chronicle.

To sum up, despite these record revenue increases the state has failed to reduce deficit spending, invest in infrastructure and still supposedly needs billions of dollars in additional taxes from taxpayers, to add to the state’s record tax take in recent years.

To borrow a phrase from the state’s most prominent left-wing economist Robert Reich, this is “baloney” and every taxpayer needs to know it.

The only solution to this out of control spending is to shut off the faucet.  If the Democrat Legislature is irresponsible and cannot control its spending, we must limit the amount of tax dollars sent to Sacramento to a bare minimum.

With the cost of government at all time highs, and the value provided by government at all time lows, it is simply not cost effective to further build and sustain California’s big government.  Furthermore, the services that government does provide are provided at such high cost and low value, that it is simply not worth it to taxpayers to pay for these services.

The California Governor and Democrat Legislature have led the State of California down a dangerous fiscal path, very similar to what happened under Gov. Gray Davis in the early 2000s, but even worse.  All the revenue windfalls have been spent, debt stands at an all-time high and is increasing, and these are supposedly the good times, based on economic growth.

When the economic correction comes, this Democrat house of cards will collapse, leaving California taxpayers holding the bag.  And then the same Democrat and public employee union interests, the ones who are currently “crying wolf” for more tax revenues, will say we need to raise taxes even higher.

Don’t fall for this new “fiscal paradox”–it’s a complete sham.  Vote no on all new tax increases this fall to send Sacramento and Democrat politicians a message a message that you’re tired of being lied to and want irresponsible politicians to clean up their act.

About the Author: David Kersten is an expert in public policy research and analysis, particularly budget, tax, labor, and fiscal issues. He currently serves as the president of the Kersten Institute for Governance and Public Policy – a moderate non-partisan policy think tank and public policy consulting organization. The institute specializes in providing knowledge, evidence, and training to public agencies, elected officials, policy advocates, organization, and citizens who desire to enact public policy change.

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