Standard & Poor once again dropped California’s credit rating to one of the lowest in the nation. This means the world does not consider us to be responsible borrowers. In a recent article in The Economist, they referred to California as being irresponsible. If you ask a Republican, they’ll tell you that we spend too much. If you ask a Democrat, they’ll tell you we don’t spend enough and must raise taxes. Both sides are wrong. We really must look at the source of our problem before we come up with solutions.
Too much spending is not a problem as long as the people of California can and want to pay for it. Irresponsible spending is the problem. You may be shocked to discover that in order to create a budget, our elected officials look into the future with a crystal ball and predict how much money will be raised. Then they go out and spend that amount. When they don’t collect enough taxes, they run out and borrow more money at higher and higher interest rates. If you have not noticed, that system is failing.
The fix is simple. We Californians must get our finances in order just like you and I have to do at home. First, we need to base spending on collections. Then we can debate how to spend it. We cannot fix this overnight, but we can put in place a policy that allows us to fix this budget mess over the next couple of years. That’s why we elected Democrats to a 63 percent majority in both the Assembly and State Senate. So, before you complain about the Republicans, just remember which majority ruled those houses and budgets for the last eight years.
The first step is to change the budget process now. On July 1 of every year, we know how much we’ve collected in the previous fiscal year. Use that number to make the budget for the coming year. If we want to spend money on a worthy cause, or raise the spending for some department, then we raise a tax, collect the tax, then spend it. Simple right? The tricky part is that a great deal of spending is based on automatic spending. Another problem is that revenue for the state comes from income tax, which during bad times drops. This puts us at the mercy of a fickle economy.
After speaking with a great number of Democrats and Republicans, they all seem to favor getting a handle on collections, then debating how to spend it. Borrowing is another problem. We just went ahead and borrowed money with no idea how we’d pay for the loan. This isn’t a good idea. The fix for that is to not allow borrowing until two years of tax collections have been received to determine how much we can pay back. This way if we need to collect more tax, then we can raise it before we default on our loan. This would also give us time to respond when revenue drops.
So, if I were made Emperor of California today, I would ask the Legislature to pass a budget law that states the following:
Starting now the 2010 budget will be frozen at 2009 services. In 2010, California will look at the 2009 collections and set the budget for 2011. All future budgets will be made based on the actual collections reported for the previous year by the state treasurer. The Legislature will not be allowed to spend or borrow more revenue than they’ve collected. All current borrowing will be for servicing current debt, and to fill the gap between current spending and previous collections. All future borrowing will require that the tax is levied and collected for two years, and the average will be used to determine how much money can be borrowed. No more automatic increases for any budget item.
Sales tax on non-food items will be the primary vehicle to raise revenue in California. We must stop the endless little taxes we pay on every utility bill. We will raise all sales tax on goods and services, and see what we collect in 2010 in order to pay back the debts and build revenue for service expansion. This is not fun, but it must be done. We already have the highest income tax in the nation. Property tax is not the solution either since it causes people to lose their homes. Too many people making over $150,000 per year are setting up residence in income tax free states while living in California. The sales tax not only addresses that problem, but it also makes sure the cash economy pays into the system. If people want to save and invest, that’s a good thing — especially if it’s in California. Since rich people spend more money than poor people, a sales tax will hit them the hardest.
We must make it clear to the people of California the relationship between their spending and the taxes they pay. We can not let the Legislature hide our spending problem with borrowing and lots of little taxes everywhere we turn. We can’t just keep spending without caring about how to pay it back. We all need to carry our fair share, but we should also know exactly what it will buy us.
David Alsabery is a high performance driving instructor and all around nice guy. He can be reached at alsabery@gmail.com.
