Debunking the Myths of California’s Budget Crisis –
Ten days have passed since that point, the state is out of cash, had the Governor simply taken the partial solution, at least we would be solvent at this point and would have enough cash to pay our bills. Instead people are not being paid with IOUs. The average person probably has not felt this yet, but that will be coming. The Governor is now talking about a fourth furlough day or another 5% paycut for state employees (which is functionally the same thing) and state employees are talking strike.
The Myth of Taxation Causing an Exodus of Wealthy Californians
“When we compare households that left the state with those that arrived from 2004 to 2007, those in the bottom fifth (with annual incomes of about $22,000 and less) are most likely to leave: 1.73 of the poorest households leave for every one that arrives. This ratio declines as income rises— so that among the top fifth (with annual incomes of about $110,000 and up), only 1.16 households leave for each one arriving. Among the highest-income households, with annual incomes above $200,000, only 1.09 leave the state for every arrival.”
In total, households in the poorest fifth are twice as likely to leave than those in the riches fifth. Indeed, the poorest group is also 50% more likely to migrate TO California from other states. Thus there seems to be a tendency toward greater mobility among lower-income households.
The report suggests that while California does have a higher top marginal tax rate 9.3% plus an additional 1% for millionaires, proximity rather than tax rates seems to explain which states California come from and move to.
“California does have high income taxes: a top marginal tax rate of 9.3%, plus an additional 1% for millionaires. Three states with no personal income taxes—Nevada, Texas, and Washington—are among the top five destinations for the highest-income fifth of California households. However, these three states are also among the top five destinations for the fifth of California house-holds, who face lower income tax rates in California than wealthier households do.”
As the study points out, “California’s progressive income tax means that lower-income households in California actually face tax rates that are similar to those of many states and well below those of others.” And yet, California loses far fewer high-income people to states without income taxes than it does low income people. “This looks like a puzzle: the poor have less reason than richer households do to move to states without income taxes.”
The real explanation is that it is not high income taxes that are chasing away Californians.
“This looks like a puzzle: the poor have less reason than richer households do to move to states without income taxes.”
They conclude that the reason the poor are leaving is not because of taxes but because of cost of living.
“States without income taxes are cheaper than California in other ways—housing costs, for example—that matter to all types of households, not only to those with the highest incomes. In other words, California does lose people to lower-tax states—but not just because of income taxes.”
The Myth of a Spending Driven Deficit
“California’s problem is mainly on the spending side. If we stuck to a budget increase of inflation plus population growth over the last 10 years, we would probably be in fairly decent shape.”
Even on the surface that does not make sense given the enormity of the economic downturn that has simply sapped the state of revenues. We did not suddenly increase spending by $60 billion in the last two years. So even on the surface that claim does not make a whole lot of sense.
However, in the Legislative Analysts Office’s (LAO) analysis of the previous budget for 2008-09, they determined that since 1998-99 spending in the general fund and state special funds had rising to $128.8 billion from $72.6 billion, or 77%.
Now let’s freeze the frame right there. Because we see a $56 billion increase over the last ten years. That is somewhat less than the actual budget deficit. So if we had completely frozen all spending increases, we’d be a lot better shape than we would be now, but obviously we would still have a deficit and it would not have kept up with inflation and population growth.
During this time the state’s population grew roughly 15% to 38 million while the inflation grew by 50%. Understand that the state does not use CPI as their inflation index but rather it measures inflation using a federal index of state and local purchases as it relates to the types of services and goods typically purchased by state and local governments. That makes sense because states do not purchase bread and hamburgers but rather things like healthcare and heavy equipment.
The bottom line here is that the budget’s growth, according to the LAO, exceeded population growth and inflation by just .2% per year. Thus the budget growth roughly approximates inflation and population growth over the last decade.
I am not suggesting that we not cut spending and find ways to save money even during better economic times, those who read this site on a regular basis know that’s not true. But spending is not the boogie man for California.
The Illegal Immigrant Factor
Add them all up and the state spends well over $5 billion a year on illegal immigrants and their families.
Of course, illegal immigrants do pay state taxes. But no way do they pay enough to replenish what they’re drawing in services. Their main revenue contribution would be the sales tax, but they can’t afford to be big consumers, and food and prescription drugs are exempt.
How does he arrive at that number?
He starts with an estimate of 2.8 million living in California according to the PPIC study, which represents the last year with a good estimate. That’s about 8% of the California population.
There are 19,000 illegal immigrants in the prisons, 11% of all inmates, that costs $970 million, but the feds cover $111 million of that reducing the number to $859 million.
“If you figure that the children of illegal immigrants attending K-12 schools approximates the proportion of illegal immigrants in the population, the bill currently comes to roughly $4 billion.”
For social services:
“Illegal immigrants aren’t entitled to welfare, called CalWORKs. But their citizen children are. Roughly 190,000 kids are receiving welfare checks that pass through their parents. The cost: about $500 million, according to the nonpartisan Legislative Analyst’s Office.”
For health care:
“The state is spending $775 million on Medi-Cal healthcare for illegal immigrants, according to the legislative analyst. Of that, $642 million goes into direct benefits. Practically all the rest is paid to counties to administer the program. The feds generally match the state dollar-for-dollar on mandatory programs.
So-called emergency services are the biggest state cost: $536 million. Prenatal care is $59 million. Not counted in the overall total is the cost of baby delivery — $108 million — because the newborns aren’t illegal immigrants.”
Again, $5 billion is not an insignificant amount of money, but it’s not causing the budget problem. The problem here is what is the solution at the state level? We argued this point repeatedly with the county cutting of services to illegal immigrants–you may save money on the front end, but you might pay more on the back end. Do we really want the children of illegal immigrants to be running around uneducated? The courts have basically had their say on this point anyway when they threw out Proposition 187 back in 1995.
The voters do not have a clear culprit. It takes some faith to accept this, but if we had a majority vote system, then if the Democrats controlled the Government and the Democrats could not fix the problems they would receive the blame. Incidentally this is what happened in 2006 at the federal level. Republicans controlled both houses of the legislature and the Presidency in 2006. The public did not like the direction and over the course of two elections voted them out. In 2009, Democrats now control both. If the Democrats fail to fix the problems, they could very well be voted out in the future.
That’s the way it is suppose to work, but doesn’t in California. Why? Whose fault is the problem right now? Democrats control the legislature but do not have the votes to pass a budget without Republican help and a signature by the Governor. So whose fault is it? Depends on what party you are. We need to change that if we want to address the broader problems.
—David M. Greenwald reporting