The mid-term elections are approaching quickly and in many states, including my home state of California, the list of candidates up for election seems dwarfed by the litany of propositions on the ballot. No less than 13 propositions are up for a vote in California, with yet more at the local level. Of those 13, 9 are either direct tax increases or bond measures (indirect tax increases). It's time for the voters of California to send their legislators a message: "Stop wasting your time figuring out how to take more of our money and learn how to wisely spend the billions you've already taken."
It has always amazed me just how different the state budgeting process is from our personal budgeting. When figuring out a household budget, we first determine how much income we have. Then we figure out how much of our spending is obligatory. Finally we decide to save, invest, or spend any excess funds. State budgeting, however, seemingly works a little differently: First the legislature determines how much it spends. Then it determines how much more it wants to spend. Then it figures out how much it actually has. When, inevitably, it has less than it wants to spend, it doesn't cut back on expenditures, rather it creates committees to determine how to raise taxes and get more money. When raising taxes is not politically expedient, the state can instead sell bonds and borrow more money, knowing that they can always raise taxes later when the obligatory spending to repay that borrowing becomes due (often conveniently in a successive political term).
Using this method, politicians can (disingenuously) claim that they have avoided cutting back popular programs and avoided raising taxes. This would be wonderful, if only it were true. If you needed to spend more money but continued to earn the same income and pay the same basic expenses, that deficit would probably translate into credit card (or other forms of) debt. You would simply be paying later (with interest) what you spent today. In California, the almost $20 billion in "infrastructure" bonds that Gov. Schwarzenegger is backing will do exactly that.
California's current total debt is approximately
$78.7 billion. Servicing this debt costs about
$3.3 billion a year, or about 4.5% of California's annual budget. If the voters in the state approve another $20 billion in bonds -- a staggering additional 30% more debt -- maintenance would rise to over $4.5 billion a year or more than 5% of the budget.
During the last special election, the issues on the ballot were predominantly about fiscal constraint and Gov. Schwarzenegger famously spoke of "living within our means." The voters resoundingly rejected living within our means after organized labor, led by the California Teacher's Unions, realized that living within our means might impact them. No problem, the governor simply changed his mind completely and decided to "rebuild California" and issue $20 billion in debt for infrastructure, all "without raising taxes," he promises.
Selling bonds for spending today -- essentially mortgaging tomorrow -- is particularly insidious, because the repayment falls disproportionately on one segment of society: Homeowners.
According to the Wall Street Journal more than two thirds, or (a record) 69% of American families now own their own homes, up from 65% in the 1990's. Unfortunately, this is precisely the reverse in Los Angeles, as well as other large metropolitan areas. Approximately
"61% of L.A households don't own the places where they live, one of the highest rental rates in the country, according to the 2000 census." So about two thirds of the population thinks that by issuing bonds, they are in essence forcing the one third of the population who are homeowners or landlords to pay for all the new debt. This would again be very convenient, if only it were true.
In 1978, California's taxpayers revolted and passed a landmark proposition, known to this day as Prop. 13. The proposition famously limited property tax to 1% of the assessed value of property and ensured that the state could not raise the assessed value more than a maximum 2% a year. Prop. 13, however, exempted "voted indebtedness" (bonds) from this maximum. Limited in their ability to raise property taxes, the state and various localities have been resorting to bonds ever since. The interest on those bonds has, in some areas, literally doubled the allowed property tax rate to 2%. California homeowners feel this hit directly as their property tax gets paid in two lump sums throughout the year. California renters, however, feel the effects of this borrowing and taxation only indirectly: when landlords pass these costs on in the form of higher rents. The average rent in Los Angeles is now
$1,750 a month, a jump of 82% in the past 10 years. Clearly renters are not getting a free ride (unless they're rent-controlled), however most don't see the effect of their ballot decisions until long after the elections are over.
Perhaps the most insidious of this year's crop of propositions is Prop. 88. For the first time since the 1970's, Californians are considering scrapping one of the key reforms of Prop. 13 and amending the state constitution to allow direct parcel taxes. Misleadingly marketed as a "save our schools initiative," Prop. 88 would establish an "initially modest" $50 per parcel tax on all property in California. What it really does is open the door wide open for the legislature to begin creating all sorts of new parcel taxes; precisely what they'll need to pay for all the borrowing they're hoping to do. Are we really willing to allow the reversal of one of the most important tax reforms in state history or are we simply being misled by glitzy television advertising?
California's infrastructure clearly needs improvement: Our schools are in trouble, our roads are a mess, our hospitals and prisons are overflowing. We all have a vested interest in dealing with these problems. The question is, do we want to deal with them directly today by creating a responsible budget or do we again want to allow our politicians to take the easy way out by simply taking more money from the taxpayer? Let's make our politicians earn their salaries by finding ways to spend the money they have better, not by spending their time thinking of creative ways to raise our taxes or borrow more money. Let's "just say no," across the board, to all the state ballot propositions.