Taxable Talk

The immovable object and the unstoppable force need to get ready: California’s annual budget woes are heating up. The Bronze Golden State is facing a $19 billion deficit, and Governor Schwarzenegger has proposed a new budget that has no chance to pass the legislature.

The Governator’s budget includes $12.4 billion in spending cuts, including the ending of California’s primary welfare program (CalWorks). There is also $3.3 billion in borrowing from other programs, and a hoped for $3.2 billion in federal aid. Democrats have already criticized the budget. Senate President Darrell Steinberg stated, “We will not pass a budget that eliminates CalWorks. We will not be party to devastating families. That’s not what any of us came to Sacramento to do.”

The problem is that the Democrats’ solution is to raise taxes, a complete non-starter for Republicans. California already has the 48th worst business climate; Democrats are trying for number one.

What California should do is cut taxes and regulations (which would encourage businesses to be in the Golden State and would lead to increased tax revenues). Salaries and benefits to government workers (especially pensions) need to be realigned towards reality. That’s going to happen, sooner or later, as California cannot afford the current costs of labor.

What’s likely to happen is nothing. There’s almost no chance of a good budget passing anytime soon. This is very likely to be a long, long summer (and fall) in the budget battles in Sacramento.

The Los Angeles Times story starts,

State tax collections plummeted unexpectedly in April, wiping out months of steady gains that legislators hoped would ease their budget troubles and restore California’s economy faster than experts predicted.

Perhaps the Legislature or newspaper writers should ask California tax professionals what would likely happen to tax collections. The only thing that was unexpected about the drop off was that it’s a surprise to some. California’s unemployment rate has risen to 12.6%. The Legislature increased income and sales tax rates in 2009. Many more people are out of work now than a year ago. How in the world were tax revenues going to increase when the average Californian is saving money rather than spending money?

California faces an $18.6 billion to $22 billion deficit. The state’s regulations make it clear that expanding businesses should look elsewhere. What California needs to do is drastically cut wage packages to unionized state employees. When I was growing up, civil servants received relatively low salaries but had good retirement packages. Today, they have great retirement packages and make more money that comparable individuals in private industry. This needs to change, just for state employees but all levels of government.

I’m not holding my breath for this to happen in Sacramento this year.