Taxable Talk

…So goes the budget fiasco in Sacramento. Nothing’s changed at all. Democrats don’t want to cut programs and Republicans don’t want to add new taxes. Governor Schwarzenegger now estimates the deficit at over $14 billion, and that the state could run out of cash in February.

The Los Angeles Times has an update but I don’t see a quick end to this crisis. Until legislators believe that not being partisan is helpful—and it’s clear that’s not the case today—nothing is going to change.

My friends know that I’m a skeptic on global warming. I don’t think that there’s proof today that anthropogenic (man-cause) global warming is a factor in the higher temperatures of recent years. Additionally, temperatures have fallen the last couple years. Am I right? On this only time will tell.

However, the California Air Resources Board has taken the theory of global warming and made it into a fact, and it’s likely to harm the Bronze Golden State’s economy. CARB has imposed a mandate that the state cut carbon dioxide emissions by 15% over the next 13 years. The regulations needed to cause this drop will be written over the next two years.

CARB believes that this will have “net economic benefits through 2020.” I haven’t a clue where they get that idea. I expect that this will give yet another reason for businesses to leave California for friendlier environs. Of course, if population drops enough California will meet its carbon dioxide goal.

All taxes are passed on to customers—that’s basic economics. The regulatory burden that is imposed on California businesses will be passed on, and we’re in the middle of a recession. But given the general dysfunction of California’s government that shouldn’t come as a surprise.

If you’re a Californian who owns real estate, remember that your first property tax payment is due this Wednesday, December 10th. The payment can be made at your county’s tax collector office, by mail (US postmark deadline of Wednesday), or online (most counties offer this). In any case, don’t forget or you will be paying a penalty.

Do you remember Ishtar? It was one of Hollywood’s bigger flops. The Wall Street Journal is now comparing Governor Schwarzenegger’s budget policies to that failed film. Is the Journal correct?

Absolutely. Governor Schwarzenegger is proposing raising the sales tax (which is already among the highest in the country). California already has one of the highest income tax rate systems (for both corporate and individual taxes). Only our property tax system can allow for somewhat lower taxes.

As the Journal notes, the budget has grown by 40% in the last four years. California doesn’t have a revenue problem; rather, we have a spending problem. A massive spending problem. I do have a possible solution, though I suspect no legislator is going to like my idea: Cut the budget 25%.

We will need to not just take a scalpel to the budget. We need to take a pick axe and cut anything and everything that doesn’t make sense. All wages of every state employee should be cut at least 20%, including those of our legislators. I know that there are union contracts that may make this impossible. Negotiations should begin immediately with all unions and they be told that the personnel budget for their department is being cut by 20%. All managers/non-union personnel are taking that cut. If you don’t, then 20% of the union personnel will be laid off.

There are numerous programs that will have to go. It might be nice to have a State Tourism Office, but not in these times. Housing and Community Block Development Grants are a nice luxury, but they should go. Likewise Enterprise Zones, the California Film Office, the Office of Military and Aerospace Support, and the Native American Heritage Commission should all go into the trash can.

What I am sure of is that if California doesn’t face up to economic reality outsiders will force it upon them. The Democrats in the Legislature won’t cut; the Republicans won’t add taxes. Eventually, either California will run out of money (likely in February) or the Legislature will reach some sort of compromise.

What’s worse is that I think the budget deficit will be far, far worse next year. What I’m seeing from my clients tells me that there aren’t going to be a lot of large capital gains declared on income tax returns for 2008 and the budget projection for the 2010 fiscal year (beginning in July 2009) is very, very rosy. It’s time for everyone in Sacramento to face reality.

So why not raise taxes? Because if taxes go up businesses that can leave California will likely exercise that option. All of the surrounding states (Oregon, Nevada, and Arizona) have lower tax structures and far better business climates than California. The climate in California is nice, but if taxes go too high business will vote with their feet.