Tuesday, September 28, 2010

California tax cuts - a cautionary tale

I'm a California girl and proud of it. My cell phone's ring tone is "California Dreamin'," and when winter comes to Chicago I start humming "Maid of Constant Sorrow" ("I'm goin' back to California, place where I was partly raised"). So I was interested in David Brooks's commentary yesterday about why the state that once "enjoyed the highest living standards in the country" - during most of the years I lived there, in fact - now "has all the dysfunctions that mark national government, but at a more advanced stage."

Brooks says the blame comes from both sides of the ideological spectrum. In the 70s, labor lobbied for better salaries and pensions, and governors shorted infrastructure in order to meet their demands. Environmental regulations discouraged small businesses (Brooks says, but does not give examples). Tax policy cut off badly needed revenue.

The result? California is one of two U.S. states on the international list of 10 states most likely to default (the other one being my current home state, Illinois, whose woes you can read about here).

Who's to blame?
Brooks does not say exactly when California's fortunes began to turn around, but he implies that problems began in the late 60s or early 70s. The last of the pro-market, pro-business, but progressive governors he lists is Edmund "Pat" Brown, who finished his term in January 1967. Brooks does not mention that Ronald Reagan was governor of California from 1967 through 1974, and I don't know if he thinks the decline began with Reagan (who, by the way, actually raised taxes) or with his successor, Jerry Brown (Pat's son).

He does, however, mention a seminal event in California's troubled financial history: the 1978 passage of Proposition 13, the property tax-cutting brainchild of Republican lobbyist Howard Jarvis. "With Proposition 13 and other measures that cut taxes," Brooks writes, "they cut off revenue and pushed through structural reforms, making it hard for future administrations to raise funds."

For 30 years, wrote Kevin O'Leary in Time magazine last year, California's leaders tried to "live with Proposition 13 while continuing to provide the state services Californians expect — freeways, higher education, prisons, assistance to needy families and, very important, essential funding to local government and school districts that vanished after the antitax measure passed." Eventually their efforts collapsed. California, the state that has led the way in education, technology, pop culture, and wine growing, is now leading the way in financial ruin.

Predictably, the conservative Cato Institute thinks Proposition 13 was just fine, inexplicably linking it to the economic surge beginning in the 1980s (remember Silicon Valley and the dot com bubble?) Their description of its influence, however, is right on:
Proposition 13 was a political earthquake whose jolt was felt not just in Sacramento but all across the nation, including Washington, D.C. Jarvis's initiative to cut California's notoriously high property taxes by 30 percent and then cap the rate of increase in the future was the prelude to the Reagan income tax cuts in 1981. It also incited a nationwide tax revolt at the state and local levels. Within five years of Proposition 13's passage, nearly half the states strapped a similar straitjacket on politicians' tax-raising capabilities. Almost all of those tax limitation measures remain the law of the land today.
Taxing and spending
Hey, if you try to take care of your maxed-out credit cards by lowering your income, you should love the results of our state and national tax revolts. Prosperity all around, right? No wonder politicians are calling for still more tax reductions.

Ah, but they are also calling for massive spending cuts. Well, yes, it would be great if the government would reduce spending (unless, of course, it reduces spending on something that affects me). Oddly, every president in the last 40 years has increased spending, including Ronald Reagan and both Presidents Bush.

Beginning in the early 80s and continuing to the present (except for a few years under President Clinton), the gap between federal revenue and federal spending has also increased. The only thing trickling - and now flooding - down is massive debt. How long can we keep this up?

I don't much like to pay taxes - federal, state, or local. I would rather live in a world where interstate highways, health care, education, old-age pensions, prisons, city transportation systems, fire departments, police departments, bridges, food safety inspections, and libraries appeared by magic. I would much rather live in a world without war and therefore with no need for a military. I just don't know where that magical world might be.

Alas, even California's Governor Jerry "Moonbeam" Brown had no fairy dust at his disposal when Howard Jarvis pulled the plug on a major source of California's funding.

It's said that "as California goes, so goes the nation." Nation, watch out. Cut taxes, raise debt, cut services, lose credit ... what's next?

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