May Revise 2022: Missed Opportunity on California Finances

California Gov. Gavin Newsom speaks during a news conference in Sacramento, Calif., on Jan. 10, 2022. Rich Pedroncelli/AP Photo

Commentary

A sensible family or business uses good times to prepare for the future. Maybe the roof to the house or building needs to be replaced, preventing future leaks while increasing equity. Maybe a savings account is padded to prepare for future contingencies.

Unfortunately, such a mindset still does not prevail in the California budget process. May 20 is the date Gov. Gavin Newsom’s office announced he will be presenting his May Revision to his January 10 budget proposal for fiscal year 2022-23, which begins on July 1. It’s the “May Revise,” in Capitol parlance.

Whereas the January numbers to some extent are aspirational, the May Revise numbers begin the grind in the legislature to the June 15 constitutional deadline to pass a budget. So the figures are more realistic.

But this year there may be an air of the fantastical also about the May Revise. In January, Newsom predicted a $45.7 billion surplus. Some Democratic sources are saying the new number could soar to more than $60 billion. But that comes as a recession is wafting toward California, America, and the world.

The prudent thing to do would be to use the surplus, whatever its amount, to do two things: First, use perhaps half to start paying down the immense $1.6 trillion (with a “t”) in unfunded liabilities run up by state and local budgets, according to a February analysis by the California Policy Center. It found, “Californians carry this $1.6 trillion state and local debt ($40,000 per capita) in addition to their share of the national debt (about $90,000 per capita).”

That means a California family of four owes $160,000 in state and local debt, and $360,000 in federal debt. Total: $520,000 in governmental debt. That’s about half the debt it takes to buy a $1.2 million home in Coastal California. No wonder so many people are leaving for other states.

The CPC analysis is detailed, and the best I’ve seen so far. I’ll only quote this further part: “While Governor Jerry Brown’s Public Employee Pension Reform Act of 2013 has begun to take some financial pressure off the pension systems, they are in no position to handle another crash. Even today, following a remarkable 10-year technology-driven bull market, the pension systems acknowledge they’re only 71 percent funded. If history repeats itself, the funds—and the California taxpayers responsible for them—are in for a shock.”

PEPRA, according to the explanation on the website of the California Public Employees Retirement System, took effect in January 2013 and “changes the way CalPERS retirement and health benefits are applied, and places compensation limits on members. The greatest impact is felt by new CalPERS members.”

If such a reform were applied to all CalPERS retirees, using part of the surplus to fund necessary adjustments, it would go a long way toward reducing the long-term liabilities. Similar adjustments could be made for the California State Teachers Retirement System, the University of California Retirement Plan and the local municipal and school plans.

Reforming Taxes

The surplus also could be used to smooth over a transition from today’s confiscatory income tax system to a flat tax. Currently, the top income tax rate is 13.3 percent. But the really punitive part is the 9.3 percent rate that hits the middle class. It digs in at just $61,215 of income. That’s about one-third of what it takes now to get a mortgage on a small suburban home in Southern California, especially with interest rates rising.

What happened was the inflation of the 1970s boosted the middle class into the 9.3 percent bracket, which back then was the top bracket. Only in 1978 was the state income tax indexed for inflation.

At a minimum, the income tax in all brackets, but especially the 9.3 percent bracket, ought to be indexed backward to 1965, before the inflation began. The middle class needs a break.

Better yet, a flat tax—one rate for everyone—should be instituted. Economist Arthur Laffer in 2012 designed just such a tax. He proposed California “scrapping all its state and local taxes and fees (except for sin taxes, which exist to modify behavior rather than to raise revenue) and replacing them with a flat tax of about 6 percent on two distinct bases. …

“The low 6 percent rate would reduce the incentive to avoid earning taxable income in California, and the very broad base would reduce the number of places where people could hide their income to avoid taxation.”

There would be two parts:

• “One tax base would be personal unadjusted gross income from all sources, with only a few deductions: charitable contributions; interest payments, including on home mortgages; and rent on one’s primary residence, to remove the current system’s preference for homeowners. A single tax rate would apply across the board, from the first dollar earned to the last.
• “The other tax base would be businesses’ net sales, or ‘value added’ – that is, the difference between sales and production costs, which equals the state’s gross domestic product when aggregated across California.”

Reform Dreams

In 2012, the state still was recovering from the 2007-09 Subprime Meltdown recession and reformers only could dream of $60 billion surpluses if they were high on medical marijuana. But in 2022, we actually do have the wherewithal to make such substantial reforms.

Alas, starting on May 20 with the May Revise, the opportunity for long-term reform again will be lost. The legislators want to spend the money on the special interests that brought them to power. Newsom is looking for a promotion to a house with white paint 3,000 miles to the east.

Except for a one-time gas-tax rebate of $400 and some minor pension paydowns, the taxpayers who pay all the bills will not be rewarded and the state’s severe financial faults will not be shored up.

One day, and that day may be soon, it all will fall down, like a leaky home roof that never got fixed.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.