Thursday, September 24, 2009


By Daniel Johnson in New University on Oct. 13, 2008
September 24, 2009 | Volume 43

Following a record setting 85-day stalemate over the state budget, the financial situation for California looks nearly as downtrodden as it did two weeks ago when state officials were seemingly still in a deadlock deciding the budget. Because the budget was planned too optimistically and state revenue has been unable to meet original estimates, the deficit, which Gov. Arnold Schwarzenegger has been aiming to close, looks like it will get a lot worse before it gets better.

In fact, Schwarzenegger has been working with his brain trust to analyze the budget deficit through an emergency meeting in which they may or may not plan to decide to ask for emergency funds from the federal government. However, rather than working with his team, planning, waiting and planning to wait, Schwarzenegger, along with friends and enemies alike, needs to appreciate the timeliness of the situation, suck up his pride and reach for those emergency funds.

It could be argued that the abundance of bureaucratic red tape and the stalemate is just politics as usual. However, with the economic crisis confronting Californians on both a state and national level, it is tough to argue that California’s budget is anything but at its breaking point.
According to data collected from “The Economist,” state revenue in the form of sales tax receipts and corporate taxes have been 9 and 16 percent lower than state estimates. Furthermore, income-tax receipts, which make up the majority of state revenue, have only done marginally better.

Rather than arguing over how to allocate money, state officials should first consider whether or not they have the money at all, which can only positively be done through borrowing money from the federal government. This must be done as soon as possible for three primary reasons. First, as long as doubt drifts over the budget at the highest level, this will trickle down in budget matters concerning all levels of employment. Second, as the world’s eighth largest economy, California is positioned to be a trendsetter among the states, as far as balancing budgets is concerned. Thus, the longer the state is in the red, the longer the smaller economies that surround it will follow. Third, the national economy is in ruin and any financial assistance the federal government can offer will lessen over time.

According to one report that appeared in the Contra Costa Times, the state budget crisis affects not only politicians, but unions as well. An example cited in the report showed that teaching unions could not negotiate with school distracts because a three-year revenue projection is required to come to an agreement. Because the state budget is not concrete, these projection numbers have no solid basis, which in turn casts doubt on agreements being reached between teacher unions and school districts.

While California’s trendsetting status is impressive for a state that is currently in turmoil, it is also a responsibility. According to a recent Wall Street Journal article, the basic moneymaking system is the same in California as it is in other states, with one exception. It is on steroids. Through such factors as exporting businesses, manufacturing capabilities and professional services, California’s economy accounts for roughly 15 percent of the U.S. gross domestic product. So when waves are made on California’s financial coast, they resonate throughout the other 49 states.

Finally, while the effects of the Emergency Economic Stabilization Act of 2008 (the bailout plan) have yet to completely settle, it is tough to argue that the national economy is anything but worrisome. As long as this turmoil exists, both federal and private sources offering funds will have no choice but to become more conservative in their lending habits. Thus, if California is in need of emergency funds, it is best to aim for them while this safety net is outstretched rather than tucked away.

Daniel Johnson is a fourth-year literary journalism and film and media studies double-major. He can be reached at

Monday, September 21, 2009

THE CALIFORNIA FIX: Tax commission report falls flat, but it's a start

Proposals to eliminate the sales tax and levy an experimental business tax are said to have 'zero percent' chance of passing. But an overhaul is needed, and the ideas may provide a jumping-off point.

By Eric Bailey in the LA Times - Reporting from Sacramento

September 21, 2009 -- It was to be the sort of big-game victory that California political leaders rarely pull off. Gov. Arnold Schwarzenegger and legislative chiefs set out to shake the roots of the state's tax system to spur the business climate and resuscitate the treasury.

But as the commission they formed for that purpose prepares to release its final report this week, business leaders are grumbling, labor unions have turned wary and once-bullish lawmakers are backing away.

The recommendations from the Commission on the 21st Century Economy, which include some revolutionary ideas such as scrapping the sales tax and imposing a broad and untested new business levy, have been met with shrugs and even a few snickers.

"It's not cooked," said state Treasurer Bill Lockyer, who was a tax lawyer for decades. "It probably needs years of work."

Republicans like some of what they see, such as the plan's call for a flatter income tax, but they don't expect to make much headway in a Capitol dominated by Democrats.

"This is the most significant tax policy proposal in three decades," said Assemblyman Chuck Devore (R-Irvine). "But the chances of this getting approved, as is, are zero percent."

Such conclusions have not completely derailed the prospects for change in a state that Forbes magazine ranks 50th out of 50 for its big tax bite and other high costs of doing business.

Schwarzenegger is expected to call a special session of the Legislature to address the commission's findings.

Assembly Speaker Karen Bass (D-Los Angeles), an early proponent of the commission, has backed away from a vow to hold a yes-or-no vote on the package. But she calls the commission's principal suggestions "intriguing."

While that is not a warm embrace, she and other lawmakers see the package as a worthy starting point for debate on changes considered long overdue. They say the commission report should spark a full reappraisal of California's tax structure, and possibly a push toward a bipartisan compromise that might actually take flight in the fickle political winds of Sacramento.

"The issue is not going to go away," said Senate President Pro Tem Darrell Steinberg (D-Sacramento). "But it's important to get it right."

Sacramento has long been an epicenter of debate about taxation.

The state's tax system was fashioned during the Great Depression, when small manufacturers churned out retail products subjected to a sales tax. As recently as 1950, the sales tax provided nearly 60% of the state's revenue.

But in the years since, California's economy has shifted to one dominated by service industries -- lawyers, engineers and other professionals whose sales are not taxed. Although the state has the nation's highest sales tax, it now accounts for barely a quarter of revenue.

The result has been an increasing dependence on income taxes, which grew from 11% of state revenue in 1950 to more than 53% in 2008. In recent years, the wealthiest 1% of the state's population has generated a big percentage of that.

Liberals say the tax burden borne by the wealthy simply reflects the astronomical rise in incomes of the super-rich in Silicon Valley, Hollywood and other enclaves. But that revenue, too, has proven volatile, soaring or stumbling with the rise or fall of the economy and the stock market.

As the economy slumped and tax proceeds plummeted late last year, Bass and Schwarzenegger got together to form the 14-person tax commission and sidestep the usual Capitol bickering.

But the commission -- attempting to do in months the kind of wholesale reconstruction some states have taken years to accomplish -- slogged along. Partisan fissures cracked open, and the group's ideas fell well short of unanimous approval from participants.

Still, Schwarzenegger believes the panel's proposed changes in the tax system are "the most significant action we can take in ending our perpetual budget crises," said Aaron McClear, the governor's spokesman.

Under the plan, the state's current half-dozen income tax rates would be replaced by two -- 2.75% for those making up to $56,000 a year and 6.5% for those earning more. Sales and corporate taxes would be replaced by a single new business levy that would spread the burden -- at a tax rate of about 4% -- more broadly and would include service professions.

The proposals have drawn heavy fire from all sides.

Business leaders are worried it could make things worse for their bottom lines and the broader economy.

"There is simply too much at stake to adopt this proposal before the implications for jobs and the economy have been fully assessed," said Allan Zaremberg, president and chief executive of the California Chamber of Commerce.

With some tax experts saying the changes would favor the rich and could cost jobs, labor leaders don't like what they see.

"This feels like a dangerous experiment," said Courtni Pugh, executive director of SEIU California, the state's largest union with more than 700,000 workers.

Among the most pointed critics are nine tax experts from Stanford, UCLA, Rice and other universities. They rose up earlier this month to oppose the bid for a broad new business levy, saying in a Sept. 5 letter to Commission Chairman Gerald Parsky that there are "numerous reasons to believe that this is the wrong course for the state to take at this stage."

They cited potential administrative difficulties, legal challenges and competitive disadvantages to California businesses compared to out-of-state firms not hit by the tax.

"The problem with this is it's a poorly designed substitute for a sales tax," said Kirk Stark, a UCLA tax law expert who signed the letter.

Lockyer and other Democrats, meanwhile, say the commission's mandate to ease the volatility of state revenue -- a boom-and-bust cycle that has sent the state spinning into deep deficits -- seems to have masked a hidden agenda.

"What they really wanted to do, in my opinion, was lower taxes on rich people," Lockyer said.

Republicans counter that their foes across the aisle had their own motivation -- to raise taxes.

Still, lawmakers from both parties insist they will fully analyze the proposals and come up with alternatives.

One strategy suggested by Democrats is to broaden the existing sales tax to include more service industries rather than impose a whole new business tax. They also want to look at tapping Internet commerce, hiking the gasoline tax to help fund the fight against global warming and adopting a levy on oil extracted from California, the only petroleum-producing state in the nation without one.

Republicans will probably push for a bigger rainy day fund to help the state better survive slumps. But they draw the line at any proposal to boost taxes overall. Nearly every GOP lawmaker has signed a no-new-taxes pledge.

In addition to ideological opposition, attempts to increase taxes would face a gantlet of special interests with something to lose.

"Any revision of the tax code is a Herculean undertaking," conceded Assembly GOP Leader Sam Blakeslee (R-San Luis Obispo).

But the commission's report -- along with the Legislature's abysmal legislative approval ratings and an election year sure to be dominated by the cry for California government to fix itself -- could still provide enough impetus for change.

"The bottom line is we've got a tax system designed back in the 1930s, when we were building widgets," said Assemblyman Charles Calderon (D-Montebello), chairman of the lower house tax committee. "We need reform. We need a system for the information age."

…Nothin' t' read while you're waiting for th' Commission on the 21st Century Economy report?

Start here:

Government Reports
State of California Department of Finance (DOF)
Legislative Analyst's Office (LAO)
Other Governmental Organizations
Reports by Non-Governmental Organizations
California Budget Project
California Tax Reform Association
Council on State Taxation (COST)
Public Policy Institute of California

THE CALIFORNIA FIX :: Taming the California Beast: So many problems, so many competing interests -- only rewriting the Constitution will do.

LA Times Editorial

September 20, 2009 -- It's not always easy to identify the tentacles that are strangling California and keeping it from fulfilling its promise for 38 million residents.

Who wrecked our public school system, which was once the envy of the world?

Who ruined the nation's premier network of highways, …the most ambitious and reliable water delivery system, …the best state parks?

Who killed the spirit of opportunity and innovation that once made California the headquarters for banks and oil companies, for makers of surfboards and electric guitars, for computers and communications?

Even if we can't identify the culprit, people here intuitively know that some kind of monster has wrapped itself around the Golden State. Well over two-thirds of registered voters said recently that they would vote yes on two key ballot measures to pave the way for a constitutional convention to wrest back control of the state for Californians.

The numbers were compiled by a pollster for Repair California, a coalition of organizations from across the political spectrum that believes a convention is the best way to make the state work again. The group has set Friday as its deadline for submitting ballot language to the attorney general. If current numbers remain strong, voters would call a convention in November 2010. The convention would take place the following year, and a constitution would go to voters for an up-or-down vote in November 2011.

But once the convention is called, then what? It's easier to agree on a fix if there's agreement on who, or what, the monster is.

Once, it was easy. Reformers and demagogues of the 1870s argued that California was being strangled by twin demons: Chinese immigrants and the Central Pacific Railroad. Anti-Chinese provisions were grafted onto California's second Constitution in 1879. But reformers believed things were still awry, and increasingly, they identified the enemy as the Central Pacific's successor, the Southern Pacific. As the state's biggest corporate presence, the railroad selected the candidates who ran for office and bought their votes to assure control over any attempt to regulate freight rates or impose taxes. As one of the state's largest landowners, it ruled agriculture and water.

The Southern Pacific became known as the Octopus, to describe the numerous corporate tentacles that worked their way into the statehouse, the voting booths, the farms, the cities. An 1880 land dispute between the railroad and settlers that grew violent and resulted in several killings became the basis of the 1901 Frank Norris novel “The Octopus: A Story of California.” The Southern Pacific's nickname stuck.

To break the railroad's iron grip on the Capitol, Progressive era reformers wrote, and in 1911 voters adopted, constitutional amendments to allow for the initiative, referendum and recall. The Southern Pacific might still have been able to bribe lawmakers into doing its bidding, but Californians now had a way to fight back. They could overturn bad laws, pass new ones and throw out politicians they believed were not serving their interests.

By 1996, when the Southern Pacific was absorbed by its ancient rival, the Union Pacific, the railroad Octopus was long dead. But there is a new multi-armed monster, more pernicious than any outside corporation ever was.

One tentacle belongs to public employee unions. Although Californians should reject the foolish notion that there is something intrinsically destructive about workers in public service, it is undeniable that their unions have gained enormous clout in Sacramento. They have the influence to select Democratic Party primary candidates in urban areas, and the money and foot soldiers to ensure their election. Then, at contract time, those unions sit across the table from officials they put in office -- officials who realize they are bargaining with people who have the power to end their careers. The greatest barrier to affordable and sensible prison reform has been the California Correctional Peace Officers Assn. -- the prison guards union. Ballot measures are made or broken by the California Teachers Assn.

Another tentacle belongs to big business. Less powerful, perhaps, than when the Southern Pacific ruled the state, business interests nevertheless exercise a remarkable degree of clout through lobbyists. Disgraced ex-Assemblyman Michael Duvall (R-Yorba Linda) may have just been telling stories earlier this month when he described trysts with a business lobbyist, but it's hard to distinguish between his supposed antics and those of lawmakers all too anxious to get, well, close to big-moneyed business interests.

Add two more arms: The state Democratic Party, in alliance with labor, and the Republicans, supported by business, seem locked in an eternal contest. But they are so invested in their game that they unite in resisting any attempt to change the rules. The parties and (more tentacles) their lawyers, political consultants, pollsters, signature gatherers, fundraisers -- effectively, a political/industrial complex -- are bent less on winning than on being able to continue playing the game.

One more tentacle of today's monster is the very weapon used to slay the last one. The initiative process, which loosened the Southern Pacific's grip on California, has been co-opted by the forces it was meant to control -- the tendency of power to seek any means to perpetuate itself.

The new Octopus is different from a single, all-encompassing railroad; this time the tentacles wrapped around California also are wrapped around one another in a knot so tight it can't be untied. It has to be cut.

That's where a constitutional convention comes in. Instead of removing one arm with a ballot initiative or shackling another with a regulation, a convention has the potential to remove all the arms at once. It can fail, of course, but it also might create a governance system that again puts Californians in control of their state, at least for a while -- until a new Octopus presents itself and a new generation of Californians rises to the challenge.