Taxable Talk

The California budget crisis continues. As of this writing, the Legislature is locked in at the Capitol. There are apparently the votes to pass the budget in the Assembly, but Senate Democrats need to convince either one or two Republicans to vote for the budget. Senator David Cox (R-Sacramento) was considered the most likely to vote for the budget but he has stated that he won’t. It’s also possible that Lou Correa (D-Santa Ana) will vote against the budget; if that happens, yet another Republican will be needed to approve the budget.

Adding some humor to this is that Democratic leaders again literally locked the doors. Members of both houses of the state legislature can’t leave the building. The last time this happened (last year) the result backfired on the Democrats. We’ll see if locking the doors was a smart move or just more of the same.

As for the budget, if you read my previous piece on it you know I’m not a fan of it. I’ll let you know if it becomes the law of California.

Various reports from Sacramento hint that a budget deal has been struck. UPI’s report states (from the Sacramento Bee)

Sources close to the negotiations told the newspaper that the tax provisions include an across-the-board hike in the income tax, higher vehicle registration fees and a 1-cent-on-the-dollar increase in the sales tax. The hikes would be in effect for a minimum of two years.

The report also states that this “…would close California’s projected $140 billion budget deficit through borrowing, tax increases and spending cuts.”

Ignoring the faux pas of the $140 billion deficit (it’s “only” $40 billion), borrowing just postpones the inevitable. Sooner or later California must realize that the state’s current level of spending is untenable. Of course, the devil is in the details, and what the Democrats have conceded (supposedly a rainy day fund and spending caps, both of which require voter approval) don’t appear nearly enough for me to think that a tax increase should be moved forward. And I don’t even want to mention the massive difficulties California will have borrowing money given current financial markets and conditions.

Additionally, anyone who thinks that a tax increase will bring in the projected amount of revenues needs to study basic economics. In a recession, people will spend only what they can afford to. If the price of goods goes up by a sales tax increase, they’ll spend less. If their income goes down (by an income tax increase), they’ll spend less. If what’s discussed above is the plan, I guarantee that come June (when the 2009-2010 budget gets debated) you will be hearing about yet another budget crisis in Sacramento.

What needs to be done is the use of an axe on the budget. Yes, this may sound draconian but California has lived beyond its means; the state has been budgeting using the assumption that good times will continue ad infinitum. That doesn’t happen (as is being borne out now) and the solution is to get down to a level of spending that’s commensurate with reality.

I may be wrong on all of this; as I said, we need to see the details. But it sounds like a deal everyone will regret in just a few months, and one which will make the economic climate even worse in the Bronze Golden State.

I like living in Irvine. It’s a great community, I have lots of friends, and I enjoy my home. But is the state so broken that no business can succeed here long-term?

It’s not that I’m upset with the budget fiasco in Sacramento. On the contrary, my sympathies lie with the Republicans who refuse to allow additional taxes. Indeed, I agree with them. We need to drastically cut taxes in California, and if we did so we would see a result that might shock the Democrats in Sacramento. We would see an increase in revenues. And if we coupled that with the major cuts in the bureaucracy in Sacramento there is no doubt in my mind that we’d see California quickly emerge from the recession.

Unfortunately, I doubt any of our leaders in Sacramento are forward-thinking enough to consider what I propose. In the end, I expect the budget crisis to be resolved by a sales tax increase of 0.5% to 1.0% coupled with a decrease in the rate of increase in California’s budget.

All of this has given me pause about myself and my business. I like it here, and I have significant ties to California, but there comes a time when enough is enough. We’re heading in that direction today.

I heard while driving last week that global warming enthusiasts predicted a severe drought this year in California. Of course, the dry weather of January promptly changed to a rainy pattern that is now predicted to last for at least the next two weeks.

Perhaps we can ask Al Gore or someone else to predict that the budget standoff in Sacramento will continue. If so, the crisis—there was no movement last week—would quickly come to an end.