Taxable Talk

California’s Controller, John Chiang, called California’s cash situation “precarious.” Mr. Chiang called on the legislature and Governor Schwarzenegger to act on the $9 billion of budget cuts by March. The alternative is that California will run out of cash.

If this sounds familiar, it should. This situation happened last year, and led to the bad budget fix last February which included tax increases.

The budget that Governor Schwarzenegger proposed earlier this month has billions of budget cuts in it. However, Democrats in Sacramento showed that they were completely out of touch with both fiscal and political realities when they passed a $200 billion health care plan in the State Assembly. (If this plan should reach Governor Schwarzenegger’s desk, he would undoubtedly veto it.) I do not expect the budget negotiations to go smoothly this year. Indeed, I can’t see a budget passing by March…or May. Even July is optimistic.

The time of easy budget cuts is gone. Most Californians do not want tax increases. It’s time to cut the budget with a chainsaw. Unfortunately, the politicians in Sacramento haven’t figured that out.

Expect IOUs to be issued again in about a month.

There is some good news in California this weekend. We’re apparently about to be hit with a lot of rain. The television stations are saying we’ll get four to eight inches this coming week. That doesn’t sound like much, but it’s a lot when the average annual rainfall in Irvine is just over ten inches. The El Nino rainfall should help end the drought that’s hit Southern California (and the entire state). If only Mother Nature could help California’s budget.

That, though, isn’t going to happen. We still have the Democrats who want to tax our way out of the problem and the Republicans who want to cut [spending] their way out of the problem. When I took physics in college, the professor asked, “When the unstoppable force meets the immovable object, what do you get?” I now know the answer: California.

The Republican analysis of the budget situation is available. Governor Schwarzenegger’s budget hopes for $6.9 billion from the federal government. California’s Legislative Analyst, Mac Taylor, doubts we’ll see that money.

The problem is that this budget, and the budgets for the last several years, have used gimmicks, slight-of-hand, and everything but looking at the core issue. It’s simple, really: California spends too much money. We need to drastically cut government spending. This means that public employees need to get less, public employee pensions need to be cut, and staffing needs to be cut. Costs shifted from the federal government to California need to be shifted back to the federal government. It’s time to be realistic about what we have coming in, and not spend a penny more.

It really is that simple. Unfortunately, there’s almost no chance of the state legislature actually dealing with the issue. Instead, more gimmicks will be in the future.

California remains in financial trouble. The state faces a $21 billion deficit. Meanwhile, the economic news doesn’t appear particularly good.

First, a judge in Alameda County (Oakland) rejected some of the furloughs implemented by Governor Schwarzenegger. The ruling impacts about 40,000 state employees out of over 200,000 impacted by the furloughs. California will appeal the ruling; there is a strong likelihood the ruling will be stayed until the appeal is heard.

Next, Governor Schwarzenegger was among many state governors noting that the health care proposals would add to California’s troubles. The Governor told Nancy Pelosi (D-CA) that the measure, if passed, would add $3 to $4 billion to the state’s deficit. Of course, given that the majority of Americans are opposed to the measure it will likely be passed by Congress in the next few weeks.

Finally, the Governor and legislative leaders will lobby the Obama Administration for aid. They’ll be looking for either money given directly to the government, or the ability to not match federal funds for certain programs.

There’s no chance of tax increases passing. Has California finally reached the point where the clock strikes midnight and the fiscal reality that you can’t spend more than you bring in occurs? Or will we see lots more budget gimmicks in 2010? After all, we’ll be using a 30%-40%-0%-30% for estimated payments for California income taxes in 2010. We can always go to 30%-69%-0%-1% for 2011….

The joy of living in California. The wonderful climate (it’s going to be 70 and sunny today). The beach is just a 15 minute drive from my house. I live in the safest city in the country. And our state has the most dysfunctional government in the world.

Governor Arnold Schwarzenegger (R-CA) will be asking Uncle Sam for $8 billion to help close the state’s usual $20 billion deficit. Unfortunately, the Democrats in the legislature know only one method of decreasing a deficit (raising taxes) while the Republicans prefer cutting programs. When an unstoppable force meets an immovable object nothing happens.

Such is life in the Bronze Golden State

Earlier this week I wrote that California might be facing a $20 Billion Deficit. You’ll be happy to know I was wrong. The Legislative Analyst (LAO) released his official forecast today; he projects a $20.7 Billion deficit for the next 18 months.

Republicans vow no new taxes. Democrats vow no spending cuts. The LAO says that increasing taxes in a recession isn’t a good idea, but that revenue enhancements are needed:

Just as the Legislature will have to prioritize its spending commitments, we continue to recommend that it do the same on the revenue side. Through tax expenditure programs—special credits, deductions, and exemptions—the state provides subsidies to certain groups or individuals in ways that often have not been shown to be cost-effective. Their modification or elimination raises revenues without having to increase marginal tax rates. The Legislature should also look to increasing fees in those cases where the costs of state programs currently supported by the General Fund can appropriately be shifted to specific beneficiaries.

The LAO also notes that expenditures will need to be cut, and that long-term solutions are needed:

The budget problems we predict are long-term in nature. They will not go away quickly. Accordingly, long-term solutions are needed. The Legislature should focus on actions that have ongoing impacts.

Of course, most of the solutions the Legislature has recently enacted have been gimmicks, smoke and mirrors that look good until the numbers have to be tallied again.

Yesterday, I heard Orange County Register columnist Mark Landsbaum talk about California’s ongoing budget fiasco. I joked to him that the Legislature would be forcing Californians to pay their 2017 taxes in 2015 in order to balance the budget. Not so strangely, Mr. Landsbaum thought that might actually happen.

What’s needed is the elimination of programs that the state can’t afford. California needs to match spending to revenues, and eliminate pork barrel government spending. Mr. Landsbaum noted in a recent op-ed piece that the proposed fix to the California water crisis would only make things work. He concludes,

Admittedly, at this stage cutting the knot of government involvement and special-interest payoffs is a monumental task. It’s something that requires men and women of principle, rather than compromisers. As a society obsessed with consensus, we may be beyond making such a hard decision, conditioned as we are to living at the expense of someone else.

The reality of taxes is that all of the money being spent by Sacramento (and by Washington D.C.) is our money. Yet in Sacramento the politicians and bureaucrats treat the tax revenues as their money. That attitude needs to change. Once it does, I believe solutions to the budget crisis will quickly be found. Unfortunately, the chance of that changing in Sacramento in the next few months is somewhere between slim and nil.

After the three budget battles during the past 18 months, are Californians ready for the fourth installment of the state budget crunch next Spring? Like it or not, it’s coming.

This report notes that a $20 Billion is possible for next year. Democrats are already saying that nothing else can be cut; Republicans vow no new taxes.

The past few budgets have been balanced with smoke and mirrors. While there were some real spending cuts in the last budget, there were also the usual budgetary shenanigans. Several one-time moves (such as the increase in state withholding that began on November first) can’t be repeated. Or maybe they can; perhaps Democrats in Sacramento will propose that during 2010 we prepay our 2011 California income tax?

As long as we have state agencies trying to implement ridiculous regulations (such as the proposed regulations on LCD televisions), I’m certain there’s waste in Sacramento.