Krugman nails the reasons for California's economic debacle

[Richardo]

http://www.nytimes.com/2009/05/25/opinion/25krugman.html?_r=1

The seeds of California’s current crisis were planted more than 30 years ago, when voters overwhelmingly passed Proposition 13, a ballot measure that placed the state’s budget in a straitjacket. Property tax rates were capped, and homeowners were shielded from increases in their tax assessments even as the value of their homes rose.

The result was a tax system that is both inequitable and unstable. It’s inequitable because older homeowners often pay far less property tax than their younger neighbors. It’s unstable because limits on property taxation have forced California to rely more heavily than other states on income taxes, which fall steeply during recessions.

Even more important, however, Proposition 13 made it extremely hard to raise taxes, even in emergencies: no state tax rate may be increased without a two-thirds majority in both houses of the State Legislature. And this provision has interacted disastrously with state political trends.

I graduated from a California university with a shiny new BA in Political Science in 1978 - the year Proposition 13 passed. Consequently, entry-level jobs in Public Administration at the city level dried up, and young Richardo was compelled to find employment in the private sector, never again to have a job that used that Poli Sci degree. I left California in 1980 for ten years, and again for good in 1993. As I tell employers, I'm not worth the amount of money they'd have to pay me to go back there.

Since 1978, the combination of the property tax ceiling, a requirment for a 2/3rds supermajority of both houses to raise taxes, and the citizen initiative have made that California's economy an ungovernable, unsustainable, internally-conflicted clusterfuck. The fact that other states are toying with the citizan initiative is absolutely unconscionable, with the end-result plainly visible.

In the face of this crisis, the GOP in California is, just as on the national level, being reduced to its base and its nonsensical, laughable core mantras of lower taxes and limited government (for business anyway - they're very much in favor of unlimited government in social issues).

While this self-immolation of the GOP is kinda fun to watch, what remains unburned is still enough to prevent rational solutions from being implemented. This is another argument for more aggressive executive and legislative initiatives from the Democrats - the leverage is in their favor, and pushing the GOP toward ideological purity will cause the moderates either to jump or reassert themselves. Either result would lessen the GOP's ability to obstruct.

[opihimoimoi]

1. A case where the WARNINGS went UNHEEDED.....and, UNINTENDED CONSEQUENCES

Gov't is a system that is needed to run a vast array things....like highways and shit...

This requires funding

Inadequate funding leads to disaster....

What is so hard to unnerstan?

Them Pubs led the way to this crap and their main Gropeanator has no answers.....

Its a case of BE CAREFUL OF WHO YA VOTE FER...Ya might get your wish.....

Nx time....for best odds...vote BLUE

[Kablooie]

3. You are very right there. The government runs a vast array of shit.

[Richardo]

5. How long have you been in California?

Does Krugman get it right from your perspective?

[Kablooie]

31. Pretty much. Prop 13 is great for my taxes but schools and other things have had problems ever since

The property tax was horribly unreasonable, people were losing their houses because taxes got too high, but prop 13 went too far the other way so that California has had bigger and bigger problems ever since.

[Bunny]

2. K&R

:kick:

[Richardo]

4. :^)

:hi:

[zipplewrath]

6. The solution for California (and other states)

In a way, it'd be a right wingers fantasy, right up until it worked. The basic solution is that tax rates be based upon government outlays. i.e if they vote to do it, they are voting to raise the taxes for it. You pass a law that says every year the taxes will be based upon either last years expenditures, or next years. I only care so much. I'd prefer next years because that means the guys that vote to do something, have to also vote to raise the taxes for it. But ultimately most pols are elected for at least 2 years so they're gonna bear the burden. It's a dumb way to run a government in someways. And it has tendencies to be manipulated both in an accounting sense, and a political sense. But the reason the right wingers would learn to hate it is because although they love "starve the beast", they rarely want to be involved in the hard choices needed to balance budgets. And in the case of citizen initiatives, it's easier to get things passed, if you don't have to make the choices about where the money comes from. Basically, what such a law says is you can't "cut taxes" directly. The only way to cut taxes, is to cut the budget by cutting programs. Let the GOP take on that effort. They wouldn't be able to pass a prop 13. They'd actually have to pass the budget cuts that would ALLOW prop 13. They could never do it. They can't get it done now.

[Statistical]

8. Many states have balanced budget ammendment that in a limited fashion does just that.

To pay for expenditures greater than current revenue they are required to issue bonds and include repayment into future budgets....

the problem is that state revenue is variable and tends to be cyclical dependent. 70%,80%,90% is driven by sales tax & property tax.
Good economy = lots of buying (sales tax) and rising property values (real estate tax)
Bad economy = opposite.

So with exact same tax rate CA may produce 20%-30% more revenue in good years than in bad ones.
Now the smart thing would be to base budget on BAD YEARS and build up surplus and pay down bonds during GOOD YEARS. Of course govt often is not that long sighted.

So during boom years many state govts expand govt rather wastefully rather than pay down these huge long term debt obligations (bonds) or save funds for the bad years that will ultimately come.

Then the bust years come and revenue declines but budget is already swelled AND the state is obligated to pay bonds.

It creates a very bad dynamic. It has been happening for 20+ years in most states. This downturn just being longer & deeper than most has brought the problem to the forefront.

[Richardo]

10. But the main point is that the citizen's intitiatives need to have a funding mechanism attached.

I think that's a great idea. :patriot:

[zipplewrath]

15. Not exactly

The have balanced budget amendments, but they still have direct control over tax rates so to speak. The real basis of my idea is that you remove direct access to tax rates. The rates are determined by the amount of spending. If you want to reduce taxes, the only way to do it is to identify what won't be spent. Try getting THAT through your citizen initiative. Under most systems, the hard decisions come AFTER taxes have been reduced. At that point usually what they choose to do is to under fund multiple areas in a faint hope that in the out years they can restore funding. Like I say, try it the other way around, try going out and passing a bill that says their going to under fund education, or police, or fire so that we can have a 2% cut in property taxes.

[Statistical]

20. I see.

Yes I agree and "pay as you go" requirement makes sense.

Not just for citizens initiatives but also for legislative action.
Want a new pre-school program. Great? How are you going to pay for it. No method of funding. It dies in committee. Period. No matter how useful or needed the program is.

The problem however for CA is much larger.
Even IF they had a balanced budget AND a pay as you go system making it impossible to pass any new program without funding they would have a problem.

Sales tax revenue is down 15%
property tax revenue is down 30%

The balanced budget just became very very unbalanced.

CA finds it hard to raise taxes because their taxes are very high (50%-100% higher than other states).
With such a high tax rate it would have been prudent to put aside reserved funds and PAY DOWN THE DEBT.
Now they are trapped just like some Americans and poorly run companies. It is very expensive to refinance debt. They are already spending beyond their means and now income just went down. The proverbial rock and a hard place.

[zipplewrath]

28. I propose worse

It's not only "pay as you go" but the tax RATE is defined by the outlays. If the rate doesn't collect enough taxes to pay the bills, the rate goes up. It goes up that is unless you define what spending won't be done. The budget gets "balanced" by a variable tax rate, not variable spending. If you want the rate to go down, you have to specify what spending you'll reduce. As such, one can't pass a referendum limiting taxes, or reducing them. They have to limit spending. The legislature can't just "cut taxes" without defining the associated spending. All they can do is cut spending until the rate "automatically" goes down.

[Richardo]

12. I like the idea of required funding mechanisms for initiatives

:thumbsup:

[Statistical]

7. What I don't understand is....

compared to other states CA has very high combined income, sales & property tax.

Given that average CA residents pays substantially more in taxes than the average VA resident..... where is the money going to?

Sales Tax:
VA: 5%
CA: 8.26 -9.26% (depends on district)

Income Tax:
VA: Sharply Progressive tax up to 5.75% (max tax bracket is more than $17K in income)
CA: Progressive tax up to 9.30%

Property (Real Estate Tax):
VA: 0.75% depends on the county
CA: 1%

Given that median home price in CA is 3x the median home price in VA that 1% to 0.75% figure is misleading.

In addition taxes on gas, electricity, cigarettes, alcohol, telecoms are all higher.

So where is the money going?

[rvablue]

32. The answer is in the caveat you wrote re: home prices.

VAers pay property taxes based on the current value of their home.

CAers pay property taxes based on the purchase price of their home, with only tiny annual increases.

So, if you bought a house in CA 10-15 years ago, for say, $250,000, but now it's worth a million, you pay 1% of $250,000, not on the mill.

As a result, municipalities have had to turn to the state to pay for many things, which eats heavily into the revenue collected by the state through income and sales taxes.

After passing Prop. 13, which capped property taxes and substantially shrunk municipal budgets, the California electorate voted on another referendum that required that 40% of the annual budget ONLY go to education. Right there, you're looking at only 60% of annual tax revenue going to pay for everything else.

It's an unworkable and unsustainable mess. Nothing in CA will improve or change, no matter which party is in power, until the legislature and/or the residents get the will to overturn Prop. 13.

[MajorChode]

9. They are doing the same thing in Texas

The state passed a law that allows the local governments to freeze the property taxes of elderly people. Most local governments in my area passed ballot initiatives that did exactly that.

Now I'm all for giving a break to those who need it, but older people are the most affluent of any age group. So tax breaks were given to those people who generally need it the least. Nothing like tying one hand around your balls and using the other to slit your throat.

[Johonny]

11. Right on the money

2/3 majority vote is just a killer. Allows just a few Republican tax cranks to control the California Budget process. Giving vast power to the super minority. Great idea!

[slackmaster]

17. You have to look at the reasons we adoped the 2/3 majority system

The problems that caused people to use that weapon to keep the legislature under control are still in place.

We have a one-party system in California - The Incumbent Party.

[JHB]

13. It's also a lesson on paying attention to what's happening

This isn't just a case of "we were right/they were wrong", it's also a lesson on public officials paying attention to what's happening to their constituents and their problems.

As I understand it, in the 70's California land prices were shooting upward, assessed home values (and taxes based on them) were likewise shooting upward. In some cases, people could no longer afford the taxes on homes they'd owned for decades. I don't know enough about the California political system (and circumstances in the late 70s) to look back and say who could have done what to change that, but it's clear that it was Jarvis and the "they're taxing you to death so they can give it away to minorities" faction who got out front and became the poster boys for fixing the property tax/inflation crisis, not Jerry Brown or other liberal Democratic politicians in office at the time.

That case of angry backlash, and similar sentiments around the country, were enough for the "Reagan Revolution" to ride into Washington, and look what that's gotten us.

Pay attention to "kitchen table" economic issues, or ignore them at your peril. That's a lesson both parties need to relearn (The Dems are better, but they still employ a lot of "expert consultants" whose paychecks depend on not learning it (and then there's the lobbyists...)).

[Captain Hilts]

14. They want govt. services without paying taxes. Infantile. Schools have tanked, etc. nt

[slackmaster]

16. That is codswallop - State tax revenues continued to increase after Prop. 13

And working Californians are among the most heavily taxed people in the USA. My property taxes are low because I bought my home almost 15 years ago. But that tax is predictable, so I can easily budget for it. Even with the 2/3 majority system to rein in other taxes, I'm finding it very difficult to plan for sales taxes and personal income tax.

The problem is spending.

[MajorChode]

27. That's the same argument used for Bush's tax cuts

The tax revenues may continue to grow because the economy grew, but unless you compare what they would have been to what they are you really don't have any metric that is useful.

California may spend a lot, but the state also has much better services than many other states. The tax burden in California is high, but not even in the top ten states that have the highest tax burden.

[havocmom]

18. Yep. And I screamed about it in 1980 when the Reaganites campaigned nationally

I knew their mindset would fuck the nation as bad as it fucked California. I hate it when I am right.

[Bluenorthwest]

19. Prop 13 was on the ballot in the first election I voted in

I voted NO. My father's council was as it turns out, very correct. He said that if Prop 13 passed, by the time I was his age, the State would be broke and property prices would soar to the point that I would not be able to buy a home in our community. In addition he said that Prop 13 would benefit landlords and large owners, allowing them to keep properties and preventing people in disadvantaged neighborhoods from gaining homeownership. What needed to be done- a cap on property tax hikes for the elderly and those of lower income- was never considered, it was all or nothing.
Dad was correct on all points.

[Richardo]

21. Your father saw more than most.

:patriot:

[book_worm]

22. Exactly.

[dysfunctional press]

23. it's not really any big secret...it won't win him any pulitzers.

[Richardo]

24. He's coasting now.

:)

[Bunny]

25. .

:rofl:

[Blue_Tires]

26. ttt

[Cha]

29. Time to pay the piper..

and it's not pretty.

[mnhtnbb]

30. As a resident , I watched CA start to destroy itself with the passage of Prop 13.

When my first child was born in 1986, I told my husband we had to get out of CA--the public schools, including the once magnificent UC system, were going down the drain. We left in 1988 and have never looked back.

You could not pay me to move back to CA. My brother did, a couple of years ago. Of course he's a Republican, so he can afford a multi-million dollar ranch house that was probably built around 1970 for about $60,000, and pays horrendous taxes on it. It's effing crazy. Just crazy.

[DCKit]

33. K&R for the comments.

However, in my opinion, no government doesn't spend whatever $$$ they've got then base their increased, future spending, on forecasts on every penny coming in.

CA government grew the monster they now can't afford to feed.

I too would ask, "Where does the money go?"

[MaxPlancker]

36. Where does the money go? Here--->

Spending on education, as of May 19, 2009.

I invite you to read the concerning CA educational mandates.

In CA education gets paid first, then everybody else.

People here in CA do not seem to realize where the money comes from to pay for the propositions they vote for. If your spending exceeds your income, well, .....

RE Prop 13, your property tax is set by your purchase price. Nobody was complaining about Prop 13 when the housing boom was smoking hot. The State based their spending partially on the huge revenue stream produced by all of the new homes and home buyers.

Oops.....

[Wednesdays]

34. K&R

:kick:

[HughMoran]

35. Well, at least older people aren't taxed out of their homes

...as happens here where property taxes are the primary method of taxation in this state.