NCPA - National Center for Policy Analysis


May 21, 2009

California voters rejected by nearly 2-to-1 the government's request for $16 billion in higher taxes, spending gimmickry and more borrowing.  Voters said it's time government faced the same spending limits that the recession is imposing on everyone else, reports the Wall Street Journal.

The results of the recent election show that voters want more restraints, and now is the time to push them, says the Journal.

First, California needs a sturdy cap on the rate of spending growth:

  • Thirty years ago this November, when California's economy was in a similar rut, three-quarters of the voters approved the famous Gann Amendment; that limited the annual growth rate of spending to population growth and inflation.
  • The result was that California's annual average rate of spending growth after inflation fell to 2 percent through the 1980s from 9 percent in the 1970s.
  • California's state per-capita expenditures fell to 16th in the nation in 1990 from 7th in 1979.
  • The economy soared, growing by 121 percent -- 14 percent faster than the U.S. average.
  • The Gann limits were effectively neutered in 1988 and 1990 by initiatives that exempted education and transportation from the cap.

The next step is to fix California's steeply progressive and antigrowth tax code:

  • California's 10.55 percent income tax and 9 percent sales tax are driving businesses and high income taxpayers out of the state, depleting the tax base month after month.
  • They also lead to overspending during the good times as revenues boom, but to budget crises when those revenues fall precipitously during the busts.
  • A 5 percent to 6 percent tax rate on sales and income without deductions would halt the flight to low-tax neighboring states and invite newcomers who could start buying houses again.

The state's public-employee pensions also need to be overhauled:

  • According to the California Foundation for Fiscal Responsibility, the state pension funds are more than $200 billion underfunded.
  • Public employees can retire after 30 years on the job in their early 50s, with lifetime retirement benefits at 90 percent of their final salary (some retirees receive $200,000 a year or more in pensions).
  • The solution is to follow Florida's lead and require new workers to accept defined contribution pensions like the 401(k) plans now dominant in the private work force.
  • Without such a reform, many California cities will go bust and the state's tax burden will grow inexorably.

Source: Editorial, "Golden (State) Opportunity," Wall Street Journal, May 21, 2009.

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