Wednesday, December 8, 2010

How compromise "works" in Washington

In an August post Taxing the "rich" and "not-rich" I offered an alternative to just extending the "Bush Tax Cuts" or just extending those tax cuts for folks who earn less than $200,000. I further noted on the subject November 7th:
It appears now that both parties are ready to screw around with the so-called "Bush Tax Cuts." That's because finding someone with any imagination or talent in Congress or the White House appears to be an impossible task....

...We won't get any policy changes. Just more name calling.
So having said that, ordinarily I would ignore the latest policy fiasco by the Obama White House with regard to the tax cuts and achieving compromise. But never in my wildest imagination could I have foreseen the dimwitted compromise proposal that appears to have come out of a few meetings between the President and the Republicans in Congress.

It's an "ignore-the-deficit, free-lunch-for-everyone" policy proposal. In what is a curious piece of irony, many Congressional Democrats and Republicans are balking while the White House is attempting to sell the deal. No one knows exactly what all is in the deal. Yes, it's one of those that has the feel of another Health Care Bill. For instance, if you were in Davenport, Iowa, you would have picked up the Quad City Times and read:
A deal to extend the Bush-era tax cuts also includes action on ethanol and biodiesel credits, U.S. Sen. Chuck Grassley, R-Iowa, said Tuesday.

The details aren’t clear yet, but Grassley told reporters that the ethanol and biodiesel tax credits would get a temporary extension, through 2011.

The biodiesel credit of $1 a gallon expired last year, and farm-state lawmakers have blamed the expiration for the idling of biodiesel plants.

The ethanol credit, at 45 cents per gallon, is scheduled to expire at the end of the year.

Grassley said the biodiesel credit extension also included applying it retroactively to 2010.

Many of the details of the tax compromise aren’t known. U.S. Sen. Tom Harkin, D-Iowa, said Tuesday he didn’t know whether the tax credits were in the deal or not.
You may be puzzling a moment wondering how such a policy proposal might have gotten into this deal, but keep in mind that when Obama was a Senator from Illinois, another corn producing state, he pushed these credits.

The compromise, for sure, includes continuing the income tax rates currently in effect at all income levels and retaining the 15% maximum rate on capital gains and dividends.

It also includes an estate tax of 35 percent on estates worth more than $5 million. There currently is no estate tax, but it is scheduled to jump to 55 percent on estates exceeding $1 million at the end of the year. So this compromise is a nice reduction for the wealthy families and a fine exemption for those in the upper reaches of the middle class.

It also includes a provision that allows businesses to expense the full cost of capital investments each year for the next two years. Apparently this is without any of the restrictions currently found in the Small Business Jobs Act of 2010 enacted in September that has a phase out for taxpayers having more than $2 million in annual eligible investment, may be taken only up to $500,000 of eligible investment, and is limited to current year taxable income.

This is the huge conglomerate version of the Small Business Jobs Act. Well, to be fair, it is unclear whether it is identical to the Administration proposal in October that would create or increase the size of a taxpayer’s net operating loss, which generally can be carried back for up to two years, and carried forward for up to twenty years. But where else are they going to get the outline for this provision?

It also includes a one year reduction in the Social Security withholding on employee's pay checks. The "FICA" withheld would drop from 6.2% on wages up to $106,800 to 4.2% resulting in a 16.1% reduction in FICA revenue. (You remember Social Security? It's that entitlement program that the recent special commission on the deficit said needed to cut benefits because it wouldn't have enough money.)

And, of course the proposal will extend unemployment benefits another 13 months for those who have been unemployed for an extended period of time.

One thing about it. The new increased debt created by this proposal will get new money into the economy. I can't see any way of avoiding having the Federal Reserve buy the Treasury Bonds that finance this just like they are currently doing to finance our increasing debt. It's a cool way of printing money.

As long as we're just printing money anyway, how about approving that $250 giveaway proposed for Social Security recipients who aren't getting a cost of living increase? But then, I guess they could just plant corn.

When you look at all this you have to say to yourself that voting in Congressional Republicans, who express serious concern about the deficit and oppose spending programs, offers real government largesse - something for almost everyone and a lot for the very wealthy. It feels like the Bush Years. Way to go guys!

And President Obama is a winner too because he finally can now prove that political compromise really works to benefit all. (That's sarcasm, in case I'm too subtle.)

Thursday, December 2, 2010

Jerry Brown brings out the dreamers, idealists, and fools

Outgoing Republican Governor Arnold Schwarzenegger called the California Legislature into Special Session this month to deal with the fact that the current 2010-11 General Fund Budget appears to be out of balance by at least $6 billion.

It appears that the majority Democrats will simply refer his proposals to committee and go home until January as is normally the case.

In January, incoming Democratic Governor Jerry Brown will offer his budget proposals which apparently Democrats think will be more acceptable than what Schwarzenegger's spokesman called "ugly cuts." His fellow Democrats must think that Brown will offer miracle solutions in response to the need to reduce General Fund expenditures by 42±% of 2007-08 cash expenditures.

When Jerry Brown was in the Governor's Office the last time, he talked about communications satellites which many now remember upon as forward thinking despite earning him the nickname "Governor Moonbeam." This was the 1970's and space was indeed the "new frontier" for the dreamers among us. And it is the dreamers among us who keep America moving forward.

Now, after his reelection to the Governor's Office, the press has started offering dream scenarios of Brown moving to create a new State Government, the idealists are setting expectations where Brown is going to resolve the State's budget problems without devastating education and welfare, and the fools in the Legislature seem to think some bright idea will make the deficit disappear.

Unfortunately, when you're Governor of California fantastical dreaming doesn't help you and your state, even if it has been the home of Disneyland for nearly 60 years.

In the 1970's Brown thought Californians should get out of their autos and stopped building much needed freeways. Besides contributing to the accidental deaths of thousands of Californians, this foolish and unrealistic dream ignoring the habits and desires of Californians and put the State's primary transportation system in a deep financial hole from which it has never recovered.

Now we read about his reputation for being cheap which will save everything. He has hunkered down dealing with the nitty-gritty details of the budget.  Let's take a side-trip to the real past here in order to show how the big picture tends to escape Jerry's view.

During his last stint as Governor in the 1970's, there were two 800 pound gorillas the Governor needed to confront.

The first of these gorilla's was the rapidly inflating real estate prices/values which resulted in rapidly growing property tax revenue which impacted heavily on the middle class. Brown reduced some spending at the state level, but didn't lift a finger to alter the growing spotlight on skyrocketing revenue - he proudly just stored the surplus revenue, creating what became known as the "obscene State surplus" during the Proposition 13 debate.

The second gorilla was a August 30, 1971, California Supreme Court decision - Serrano v. Priest - in which (with only one dissent) the court stated:
We are called upon to determine whether the California public school financing system, with its substantial dependence on local property taxes and resultant wide disparities in school revenue, violates the equal protection clause of the Fourteenth Amendment. We have determined that this funding scheme invidiously discriminates against the poor because it makes the quality of a child's education a function of the wealth of his parents and neighbors. Recognizing as we must that the right to an education in our public schools is a fundamental interest which cannot be conditioned on wealth, we can discern no compelling state purpose necessitating the present method of financing. We have concluded, therefore, that such a system cannot withstand constitutional challenge and must fall before the equal protection clause.
While he was earning the Governor Moonbeam nickname, these two gorillas remained at large here on Earth in California. By the time of Proposition 13 several years into Brown's tenure, neither Brown nor the Democratically controlled Legislature had adequately addressed Serrano, which offered an equity goal which at least partly could have been accomplished using most of the "obscene State surplus" to reduce property taxes while establishing some level of balance between rich and poor school districts.

Instead of providing leadership for the real world, Brown talked about satellite communications and Californians not relying on the automobile. While the former idea would become ripe for State use fifteen years later, the latter idea was reflective of just how out of touch with 95% of Californians Brown really was. It was Brown's failure as a leader to honestly address these issues before and after Proposition 13 was adopted that got us into the budget crisis he now is struggling with.

Californians are now are hopeful about Brown. He's rolling up his sleeves, working hard on understanding the budget crisis and his options, choosing not to go to the White House with other Governors. This image does not correspond to reality, again.

Brown was Governor from 1975-1983, so he understands budgeting. Brown has been the second most significant elected State Officer, just behind Governor, as State Attorney General during the entire period of The Great Recession. What is it Brown needs to study to gain an understanding of the State Budget situation and why didn't he fully understand it as a former Governor and current Attorney General?

As with all government, the State uses "fund accounting" which means that each fund, other than a general fund, derives revenues for specific purposes. Brown understood this 30 years ago.

Only two funds have an immediate, significant problem with no potential solutions in sight - the General Fund and the Unemployment Insurance Fund. (Despite the political pandering of the past few years encouraged by an uninformed press, California's two public employee retirement funds don't face potential default until 2030 and we're already correcting for that potential.) Unless he's deaf and blind because he's old, as Attorney General he had to be in touch with this reality.

On December 24, 2009, it was reported by the folks at Bloomberg that "California Governor Arnold Schwarzenegger, anticipating a $21 billion state budget deficit, plans to ask President Barack Obama to ease mandates and minimums on social programs to save as much as $8 billion."  Surely Attorney General Brown knew this. Even though when the Legislative Analyst's Office issued it's updated report this month quoting $24 billion as the deficit size and all major California newspapers reported it as a shocking surprise, it couldn't have been a surprise to Brown.

Cash disbursements from the State General Fund reached a high in fiscal year 2007-08 of $107.3 billion. By 2009-10 disbursements were cut to $86.7 billion. That was a $20 billion or 19% reduction. At the end of the  2011-12 fiscal year, another $25± billion reduction in General Fund spending will be needed.

Despite what the typical California voter thinks, the breakdown of cash expenditures for State Programs and Local Government Assistance from the General Fund was as follows in 2007-08:

Total Education $52.2 48.7%
Total Health & Human Services $28.7 26.7%
Total Prisons and Jails $9.5 8.8%
Total Debt Payments $3.6 3.4%
Total Resources Protection $1.4 1.3%
Capital Outlay $1.3 1.2%
Everything Else $10.6 9.9%
Total Cash Disbursements $107.3
Debt payments will be $6± billion in 2011-12 and cannot be reduced as the voters approved all that spending.

The bulk of spending for Prisons and Jails is under the control of a federal court, beyond the control of the Governor and Legislature. This is because the totally uninformed voters approved the three strikes law without authorizing at least a 20% income tax increase to cover the costs.

General Fund spending for Resources Protection (CalFire, environmental law enforcement, state parks, etc.) was cut 15% by the end of 2009-10. This November the uninformed voters foisted upon their collapsing State Government a new environmental program while simultaneously making it impossible to establish fees to support the program.

"Everything Else" which includes such things as the court system had been reduced by 42.5% by the end of 2009-10. (Brown already is saving an estimated additional one-fourth of one percent in the "Everything Else" costs by not hiring a Chief of Staff for which he has been lauded by some.)

If Brown is as knowledgeable, wise and competent as even the more conservative press is discussing, he must have known all this as Attorney General who previous served eight years as Governor.

Since Brown has pledge to not increase any taxes immediately, he must make most of the $25 billion in cuts out of:
  • Education which is an area saddled with voter approved spending mandates and 
  • Health and Human Services, expenditures that mostly benefit our children and further reductions in which will result in the loss of at least two federal dollars for each General Fund dollar not spent.
In both areas, by the end of 2009-10 spending had been cut about 20%.  Those were the "easy" cuts. Here's what the big picture might look like after another $25 billion in cuts are factored in on a formulaic basis:
STATE PROGRAMS & 2007-08 % of 2011-12 % of % of
LOCAL ASSISTANCE Actual Total Possible Total Cut
Total Education $52.2 48.7% $26.1 42.1% -50.0%
Total Health & Human Services $28.7 26.7% $14.3 23.1% -50.2%
Total Prisons and Jails $9.5 8.8% $8.5 13.7% -10.4%
Total Debt Payments $3.6 3.4% $6.0 9.7% 66.2%
Total Resources Protection $1.4 1.3% $0.7 1.1% -49.5%
Capital Outlay $1.3 1.2% $1.4 2.3% 9.9%
Everything Else $10.6 9.9% $5.0 8.1% -53.0%
Total Cash Disbursements $107.3
Sure, there are always some things to be discovered and some innovations to be implemented. And perhaps shuffling duties around between State and local government can save some money. But this level of restructuring government deserves extensive serious policy discussion in an open forum by people who are aware of what it really means. Brown has a month for this, enough for any genius.

In fact, almost no one in the press understood the facts before the election and Brown made no effort to educate them. So the public was, and still is, ignorant of the facts. Now no one offers even a guess regarding how General Fund spending could be reduced 40% over the fours years from 2007-08 to 2011-12.

Rabid anti-government types attack State Employees. Cutting State employee costs is not going to do much. Of that 2007-08 General Fund expenditures shown above, around 10% is for state employee costs including pension contributions (other than the two university systems). When you must cut 40% and you can't function without employees, don't expect meaningful savings to come from reducing state employee costs.

This brings us to the economy. At best, California's economy is at rock bottom. We've lost more than a million jobs since November 2007 (exactly how many more is a statistician's game). No "recovery" that includes replacing those jobs plus adding those jobs needed to employ an expanding workforce will be seen in the next decade.

Within that context we have calls for keeping taxes low and even providing incentives to help grow our State's economy. All these proposals are absurd. It's as if they all prefer to ignore the fact that we have a huge loan coming due on our Unemployment Insurance Fund.

In it's latest report, the State Employment Development Department tells us that the Fund will have a "deficit" of $16 billion by the end of 2012. A Legislative Analyst's Office report entitled California's Other Budget Deficit: The Unemployment Insurance Fund Insolvency October report explained that the fund has been borrowing from the federal government to cover basic initial claims (not extended claims which are covered by the federal government). That $16 billion is not just a deficit, it is a loan, a secured loan with terms.

We have this loan because we didn't collect enough money from private sector employers for unemployment insurance over the past 20 years. We acted in a manner that inflated private sector profits between 1990 and 2010 by perhaps 1% overall.

Had the amount we borrowed since January 2009 been repaid within a year, it would be interest free. The interest rate is about 5% and interest cannot be paid from Unemployment Insurance Fund monies. It will likely be paid from General Fund monies. The past failure to collect from employers could cost schools or child health care $800 million a year in Unemployment Insurance Fund interest beginning in 2012.

Further, unless the Legislature increases Unemployment Insurance rates significantly in order to (a) start collecting enough to cover the next big economic collapse and (b) to repay the loan, the federal government will increase increase the federal rate on California employers from 0.8% to as high as 6.2%. Regarding this maximum rate, the Legislative Analyst's Office stated:
We note that even this $6 billion tax increase would not be enough, at this point, to address the insolvency problem and cover the projected fund deficit.
And the LAO further noted:
If the state fails to make interest payments on time, employers would immediately face the $6 billion in costs that might otherwise be phased in gradually as described above. The state would also lose its entire federal UI administrative grant, which is typically around $400 million annually, until the interest has been paid. Absent these federal funds, UI administrative costs would most likely be backfilled by the General Fund.
The Unemployment Insurance Fund situation, in terms of California's economy, is remarkable for how negative an impact it could have in attracting employers in the long term. The only relief that could possibly be obtained would be if the federal government altered its policy.That's one reason why it seems almost irresponsible that Brown chose not to travel to meet with Obama and the other Governors and members of Congress.

Perhaps he has noticed that the Republicans in Congress are willing to let extended unemployment benefits expire rather than drive up the federal deficit. Maybe he already knows that getting Congress to bail out an irresponsible California is a losing cause and he is developing solutions that won't negatively impact on the State's economic recovery. He probably knows this because in January the Republicans take control of the House of Representatives and California is a State the Republican Party detests.

Anyway, budget idea discussions are going on in Sacramento.

We hear rumors about reducing the programmatic requirements school districts have to meet in order to cope with reduced funding. Those that want to continue to provide certain educational services could do so, if they can find the money elsewhere. After Proposition 13 Districts in many wealthier areas were able to get approval of special per-parcel tax levies that helped cover lost income. It is likely that Serrano guidelines are not being met in California today. So why not make it worse?

We hear rumors about shifting some General Fund service responsibilities to "local government" which is a euphemism for "county." Creative local policies could be developed for such programs as child health care. At the same time, funding mechanisms would be provided  - such as authorizing "local governments" to raise taxes locally.

This would, of course, lead to huge discrepancies in services available depending on in which county you resided. And probably this would lead to a Serrano type case, as health and social service programs are federally supported statewide programs. Counties are just an administrative arm of the State of California, not some imaginary a separate government free to do things like reduce service to kids in the poorer counties only.

It will be interesting to hear what big picture, long term budget solutions will come from Brown's rolled-up shirt-sleeve, midnight oil work.

One thing seems certain. It will not be a proposal to increase the 1% property tax rate established in Proposition 13 to 1½% in order to establish a stable $20 billion revenue source for education.

After all, some alternative to traditional public education must exist so that spending can be cut, just like highway construction was cut last time Brown was Governor when he so successfully got Californians out of their cars....

Friday, November 12, 2010

The Magic Kingdom of California: leading the nation again

California has been the leader in national trends. We do things in a big way. The current situation with our government is no exception.

We began the angry taxpayer movement in 1978 when we voted for Proposition 13. In 30 years it has resulted in huge tax breaks for some of the largest corporate property owners in the State and established a social policy that keeps our more financially secure senior citizens in large homes where they pay low property taxes while a young family that buys a new smaller home gets to pay 3 to 7 times more taxes. And you thought we were a bastion of political liberalism, right?

It has made the funding of our government and schools unstable forcing government to exacerbate hard economic times rather than smooth out the impacts of recessions.

And now we are about to see over the next few years what it's like to live in a State where the budget for education and fighting wildfires has been cut 40-50% over a period of four fiscal years from 2007-08 to 2011-12.

It is clear that The Gubernator (Arnold Schwarzenegger) and Governor Moonbeam (Jerry Brown) are working together to prepare the denizens of The Magic Kingdom (the State of California) for a shock. What we can hope for is that it will be shock followed by awe.

Normally in December the Legislature meets and each house organizes itself, then everyone goes home until January. But the Gubernator has called The Deliberators (the Legislature) into a special budget session for December.

The Deliberators in the State Senate include 24 Democrats and 14 Republicans with two vacancies. One Democrat has never served in the Legislature, but is a former staffer. One Republican has no experience in the Legislature and will be trying to find the restrooms during the special budget session (in other words will have no idea what's going on).

The Deliberators in the State Assembly include 52 Democrats and 28 Republicans. Of the Republicans, 10 have never served in the Legislature but only 8 will be looking for the restrooms during the special session as 2 have significant lobbying experience. Of the Democrats, 14 have never served in the Legislature, though 6 are former staffers, leaving 8 looking for the restrooms during the special session.

So in January at the beginning of the 2011-2012 two year session, of The 118 Deliberators working with Governor Moonbeam, only 16 will be unfamiliar with most everything except where the restrooms are. So  term limits haven't left us with a totally inexperienced Legislature. We just have one in which nearly no one was in office during the last recession.

The only meaningful problem the State has right now is the budget. Getting The 118 Deliberators to keep focus on that problem will be like herding cats.

How bad is the problem? Well, since 2007-08, no serious effort has been made to deal with what the Legislative Analyst calls "a structural deficit." Instead, stupid budget tricks have been used to create a fantasy image of a balanced budget. But at the same time expenditures have been cut in the past three years, by $20 billion as noted in previous posts, while policy issues were never addressed.

The 2007-08 expenditures were the last numbers before The Great California Slump. While a $25 billion deficit has been identified for 2011-12, here's an example of the cumulative level of cuts that should be reviewed from a policy standpoint (click on the image to see a larger version):

For even Republicans among The Deliberators who are concerned we haven't cut enough government spending, a 42% budget reduction should be somewhat surprising. For Democrats who realize that Governor Moonbeam has said he will not increase taxes except with voter approval, panic should be setting in as more than half those cuts need to put in place in the next six months.

The level of demolition to our educational system will be catastrophic.

With regard to reducing the level of care of children through health and welfare programs, these programs will lose at least two federal dollars for each state General Fund dollar cut. (Forget the elderly and disabled, we have to throw them under the bus.)

State parks and environmental law enforcement will be competing with CalFire and all will lose. Bring out the padlocks for the park entrances. And who is going to spend money on enforcing those environmental regulations the voters just confirmed? In the same election, the voters eliminated the ability of the Legislature to levy fees to support enforcement.

We are about to institutionalize the adage that our late beloved President and Former Governor Ronald Reagan recited about recessions  "government is not the solution to our problems; government is the problem." He was our guy, so I guess we want to try it his way by having less government. (Well, not how he did it, but what he said.)

Other than to make permanent cuts of this magnitude, only one real option exists to improve revenue on a stable basis. Increase the Jarvis-Gann property tax rate from 1% of assessed value to either 1½% or 2%. The only issue is how much do we want to increase revenue - $20± billion or $40± billion?

Whether Governor Moonbeam could persuade the voters to approve such an increase is questionable.

But patches being discussed such as keeping in place the $8 billion from the 20% temporary sales tax increase from  5% to 6% and seeking approval of a 10% surcharge on income tax won't make much of a dent. And relying primarily on unstable sales and income taxes is part of the reason the Magic Kingdom is in this mess.

It is more likely we are going to demolish our State's government and school systems. How we go about reconstructing our governmental services will provide a peak into the future for the rest of the nation.

The Great California Slump has left us with a 1.4 million job loss. In September, nine of the nation's 13 metropolitan areas with an unemployment rate of 15% or higher were in California. Among metropolitan areas with a population of 1 million or more, Riverside-San Bernardino-Ontario had the second-highest unemployment rate in the U.S. at 14.8 percent, just behind the 15-percent jobless rate in Las Vegas-Paradise, Nev.

Nothing about this situation can lead one to believe that things will noticeably improve in this decade. Which leaves the government funding problem a permanent problem. If you have been reading my posts for the past two years, you know I've been saying that. Now the Legislative Analyst is saying it, offering charts like this:

So watch us here in The Magic Kingdom of California. We'll show you just how to put into effect a major government reduction that will be the conservative movement's dream. And Democrats will have to do it.

Thursday, November 11, 2010

State Controller's Report for October: look at the numbers and ignore the spin

The San Francisco Chronicle was the first of the major California newspapers to report on State Controller John Chiang's October financial statement. Partnered with Bloomberg which distributes the same article nationwide, the headline is California October Revenue Topped Budget Estimate by 4.6%, Controller Says.

The problem is nobody in the press seems to know how to compare these numbers to prior years or otherwise use them to see what's going on. A good reason exists for this.

Because of manipulations by the Gubernator and the Legislature of personal income tax withholding tables and the institution of drastic penalties for underpayment of corporate tax estimates, two of the key revenue numbers can't be compared from year-to-year. However, sales tax collections can be compared and can tell us what's going on with taxable sales.

When one adjusts for the fact that the sales tax rate is 6% of taxable sales in 2009-10 amd 2010-11 as opposed to 5% in 2006-07, taxable sales from July through October 2010 are down 18.0% from 2006-07.

It is true that during the same period last year taxable sales were down 19.4%. Yes we may have edged a slight gain during this period. The auto sales factor has to be taken into account because of the Cash for Clunkers program last year. But apparently it isn't a major factor. The California New Car Dealers Association publication California Auto Outlook reported:
...The market increased a marginal 0.2 percent in the Third Quarter. The apparent loss of market momentum was due primarily to relatively strong sales during the Third Quarter of 2009, when the market was given a boost by the Cash for Clunkers program.
So the 1.6% increase in taxable sales in July-October 2010 over the same period in 2009 is a fair indicator of growth in retail sectors other than auto sales. At this growth rate, by 2022 taxable sales will grow to 2006 levels.

Chiang, who knows better, tells us in his summary:
We are seeing indications that California has weathered the worst of the “Great Recession.” However, the road to full recovery is going to be a long one. Although current data on economic output in California is not available, we are fairly confident that the state’s economy has begun to grow again....
He then blathers on about employment and personal income which are not statistics generated by or used in his Department.

One could, like Chiang, spin a tale that the economy is growing again. Of course, the California Department of Finance estimates that the population growth rate between years is about 1%. And the U.S. Bureau of Labor Statistics indicates that, depending upon which index you wish to use, that the consumer price index has increased somewhere between 0.4% to 1.1%. So it's reasonable to conclude that the 1.6% increase in taxable sales means that per capita taxable sales in constant 2009 dollars shows no growth.

The Great California Slump has left us with an economy that crashed from 2008-2010. Based on the one statistic that we can rely upon - sales tax revenue - the California economy will remain at rock bottom for the foreseeable future.

Wednesday, November 10, 2010

The California $46 billion dilemma

Today the State Legislative Analyst issued an outlook for the State General Fund Budget:
Our forecast of California’s General Fund revenues and expenditures shows that the state must address a budget problem of $25.4 billion between now and the time the Legislature enacts a 2011–12 state budget plan.
It is surprising how close that is to what I wrote last Thursday:
Depending upon revenue, it appears that $20-$30 billion (23%-35%) needs to be cut from 2009-10 spending levels by 2011-12
And that is on top of the $20.6 billion we reduced cash expenditures from the 2007-08 level. It's our $46 billion dilemma.

It has been puzzling since the election to watch all the players in California State Government already maneuvering for some big positive change that will come about because the Governor is going to be a Democrat and the Democratic majority in the Legislature can adopt a budget by a majority vote in each house.

Doesn't anyone get it? In the San Francisco Chronicle after the election San Francisco School Board Member Rachel Norton blogged:
California faces a projected $21 billion budget shortfall for 2011-12...
As I started reading her post, I thought here's someone who gets it. But it soon became apparent that her education issues discussion was oriented to improvements in the schools, all still on the front burner. This seems to be a general approach to whatever ox or oxen is owned by the writer or speaker.

Hey folks! Your oxen are going to be gored to the point of severe crippling in the fiscal year 2011-12 budget. Look at the numbers. The actual cash spent in 2009-10 was already $20.6 billion below 2007-08. Assuming a need to cut $25 billion from 2009-10 cash outgo, here's what reality looks like (click on the chart to see a larger version):

What don't people understand? Even if by some miracle Governor Moonbeam and the Deliberators discover an extra $10 billion available for the year, the situation in the Magic Kingdom will be stark.

The State of California cannot print money. Nor can we borrow it. Even if we legally could, no one would loan it to us.

And so will Governor Moonbeam and the Deliberators go to the voters for a tax increase? Well for starters, there's that pesky problem of the 20% temporary sales tax increase that went into effect in April 2009 which will expire the end of June 2011. They increased the State's share of  the tax from 5% to 6% which produced $4,443,169,000 in cash in the fiscal year 2009-2010. That's $4.4 billion that will be going away.

So what are we to do? Ask the voters to approve that 20% sales tax increase on a permanent basis? That, along with a 10% surcharge on personal income tax which would generate about the same amount of money, would take care of the $8 billion in revenue losses. Sure, the voters will approve that. Now where will the remaining $17± billion come from? Here's how we will have to cut to balance the budget if the voters approve to continue the 20% sales tax increase and to put a 10% surcharge on the personal income tax:

Then there's the State's economy. The Legislative Analyst forecast is less pessimistic than mine. What supports that less pessimism view I'm not certain.

Nothing is worse for a State's economic future than a collapsing government. That is particularly true when you've cut education expenditures by 40%-50% over four years. What will a prospective employer contemplating a startup in or moving to California think about the situation with the State's previously highly regarded university system?

With regard to the Cal State University system, we learned today:
The California State University Board of Trustees has approved a 15% hike in undergraduate tuition, arguing that the action was an essential step to provide access to the Cal State system by more students.

The two-step increase will raise undergraduate fees 5%: $105 for the rest of the school year, and an additional 10% -- or about $440 -- for next year.
The fees (tuition) will become $4,884 for an academic year. The CSU system receives the same amount of money from the state as it did five years ago even though it has 25,000 more students.

The situation with the University of California is similar:
If approved by the UC regents in San Francisco next week, annual tuition for undergraduates would jump from $10,302 to $11,124 - about double what it was six years ago. Add in the mandatory fees, and the cost would rise to $12,150. Graduate level fees would also rise by 8 percent.

"We're down a billion dollars" from what the state gave to UC in the 2007-08 budget year, [U.C. President Mark Yudof] said Monday, explaining why he is asking for yet another increase. Last year, the regents hiked tuition by 32 percent, an increase that took effect this fall after a year of sometimes violent protests by students.
Already the egalitarian left wing is attacking the folks struggling to keep the Cal State University and University of California systems at somewhere near a respectable level.

And there's a certain irony that the conservative financial folks a Bloomberg news actually act as if this is news. Anyone who doesn't need to take off their shoes to count to 20 should have seen it coming, except perhaps the voters of California who live in the Magic Kingdom.

So what about Wall Street? From Bloomberg News in an article that says we may (?) face this deficit:
The new deficit figure comes as the state is preparing to sell about $14 billion of long- and short-term debt during the next two weeks. Standard & Poor’s rates California general- obligation debt A-, its fourth-lowest investment grade and the worst rating among states.
In other words, our State finances are in such disarray that it is comparable to the family member whose credit rating is so bad he borrows from loan sharks just to live. Now Governor Moonbeam and the Deliberators merely have to keep the State's legs from being broken by creating a solution to a 42.5% reduction in available funds since 2007-08, a problem that looks something:

Oh, and they need to do this by achieving a consensus among all interested parties

One other thing worth noting. California Controller John Chiang, who was just reelected to another four year term garnering 55% of the vote, on January 7 told KPIX veteran newsman Hank Plante that the State General Fund deficit could likely reach $35 billion. Given the problem with the Unemployment Insurance Fund, he was probably correct.

Sunday, November 7, 2010

Déjà Vu the other way around

On Wednesday, November 5, 2008 I posted a thread here with the title Obama's win is not a mandate for liberal social policy - consider California's Prop 8.

This time around Republican's took the House of Representatives. Big deal? Not really. They think it is, but they're wrong.

Not only do they not have a mandate for conservative social policy, they don't have a mandate for pro-corporate conservative economic policy. If any politicians believe the typical American voter wants to see multinational corporations and their executives continue to make more money for themselves instead of using revenue increases to employ more American workers at decent wages and benefits, they're delusional.

Anyway. It appears now that both parties are ready to screw around with the so-called "Bush Tax Cuts." That's because finding someone with any imagination or talent in Congress or the White House appears to be an impossible task.

In my August post Taxing the "rich" and "not-rich" I offered "My Plan" that involves letting the "Bush Tax Cuts" expire and, instead, adopt the following:
  • Triple the exemption for the filer (the "Yourself" box on the 1040 form) from $3,650 to $10,950, double the exemption per additional person ("Spouse" and dependents) from $3,650 to $7,300, and index that credit to the CPI for the future, a policy that has been needed for years.
  • Institute for businesses an Investment Tax Credit for tax years 2011 and 2012 with a carry over of unused credits into 2013 and 2014, up to a maximum total of $120,000, and only on purchases of new business equipment and rolling stock manufactured in the United States.
  • Institute for businesses an Employee Expansion Tax Credit for tax years 2011, 2012, and 2013 equal to the amount paid on the employers' share of Social Security (FICA) on jobs newly created and continuously filled for more than six months (compared to the September 2010 reported positions).
  • Institute for businesses and individuals a Newly Constructed Building Purchase Tax Credit for tax years 2011 and 2012 of $5,000, allowable on purchases of residential and commercial buildings constructed during the period of 2008-2011.
Of course, these are economy-oriented policy ideas. The Washington solution is to argue between the Obama Administration's proposal to keep the "Bush Tax Cuts" except for the highest income group versus the Republican proposal to keep the whole "Bush Tax Cuts" as is.

We won't get any policy changes. Just more name calling.

Thursday, November 4, 2010

The Magic Kingdom 2011: Governor Moonbeam and the Deliberators

The 2010 General Election is over and "The 2010 Meg Whitman Local TV Station Recovery Program" has ceased.

California generally bucked the trend of a Republican tide. Jerry Brown, hereinafter referred to as Governor Moonbeam, will become Governor on January 3, 2011.

At the same time, the new Legislature, hereinafter referred to as the Deliberators, will begin a two-year session. The makeup of the Deliberators changed slightly in that the Democrats actually gained two seats in the Assembly giving them 65% of the membership. In the Senate, they will continue to have 63% of the membership.

The voters in the State of California, hereinafter known as the Magic Kingdom, voted to allow a simple majority of the Deliberators in each house to adopt a State Budget. They also voted to:
  1. Add to the requirement for a 66.7% vote in each house to raise taxes by including more "fees" in the definition of "taxes" and reversing prior increases in conflict;
  2. Prevent the Legislature from borrowing or shifting certain gas taxes and redevelopment tax revenues to balance the State General Fund; and
  3. Not roll-back an existing provision that allows corporations
    • to income average future profits with the past few years losses,
    • to share tax credits among affiliated corporations, and
    • in the case of corporations doing business outside California to determine the portion of its taxable profits on in-California sales as opposed to a formula taking into account in-California payroll, California property ownership, and in-California sales.
Item 1 will increase State General Fund costs by at least $1 billion annually.

Item 2 will reduce funds allocated to the State General Fund by about $2 billion annually.

Item 3 will reduce State General Fund tax revenue by $2.3 billion annually over at least the next three fiscal years.

So, the voters of the Magic Kingdom with their left hands gave Governor Moonbeam and the Deliberators the ability to approve a State Budget with a majority vote. With their right hands, the voters of the Magic Kingdom reduced by $3 billion funds used needed to "balance" the General Fund and confirmed the elimination of $2.3 billion in corporation taxes collected in previous fiscal years.

Oh, and by the way, about $8 billion in revenue will disappear when temporary increases in the vehicle license fee and sales and income taxes expire July 1. And even the most optimistic analysts admit that the "balanced" General Fund Budget for the current year is at least $5 billion short. And, the bill comes due to repay at least $2 billion that the Gubernator and Deliberators siphoned from local governments in 2008. Oh, then there is that other 2010 General Election fact at the federal level, the Republicans took control of the House of Representatives assuring the end of federal stimulus money which provided $6 billion to local schools in 2009.

In a related subject, while the federal government may or may not extend the unemployment benefit period for millions of unemployed Californians next year, the odds that California will not have to start repaying the huge unemployment insurance fund loan beginning in 2012 have all but disappeared. That will result in an increase in direct payments by California employers to the federal government as explained in my last post.

Governor Moonbeam has indicated he will roll up his sleeves and start working. He's been thinking out loud that he doesn't need a Chief of Staff while he personally organizes his administration and prepares a revised General Fund Budget for the current year 2010-11 and a Budget for next year 2011-12.

We know that most of the easy one-time "gaming of the system" budget balancing techniques have been used up, such as shifting the last payroll of the year from June 30 to July 1. And we know, as discussed above, that:
  • The current budget as adopted is at least $5 billion short;
  • The election eliminated $5.3 billion of borrowing from local government and corporation taxes;
  • We are losing $8 billion in temporary revenue increases;
  • We likely won't be seeing about $6 billion in federal stimulus money in the future; and
  • We need to repay a minimum of $2 billion borrowed.
Depending upon revenue, it appears that $20-$30 billion (23%-35%) needs to be cut from 2009-10 spending levels by 2011-12. As a basis for budget preparation, here's the financial picture resulting from The Great California Slump comparing 2007-08 spending to 2009-2010 spending (click on the image below to see the table full size):
As Governor Moonbeam knows and you will note, by 2009-10 the State of California had already cut its spending from 2007-08 levels by $20.7 billion or 19.2%. Here's what Governor Moonbeam and the Deliberators are facing:
  • 47% of 2009-10 spending was for education (preschool - university), which many of the voters seem to have said they don't want cut, partly because cutting education is cutting California's chances for future economic growth;
  • 27% of 2009-10 spending was for the State's share of  Health and Human Services, an area which is problematic because for every $1 cut, anywhere from $1 to $3 of federal funds will not be spent in California during the budget year, reducing the State's economy accordingly; most cutting here impacts on children, the disabled, and the elderly and their caregivers, which seems like a good place to cut to avoid raising taxes on multistate/multinational corporations;
  • 9.6% of 2009-10 spending was for prisons and jails; most of this spending is controlled by a federal judge, so one can make more "pretend cuts" like the Legislature did in the adopted current year budget or put in an honest estimate of spending or release a bunch of prisoners;
  • 1.4% of 2009-10 spending was for Resources Protection including State Parks, CalFire, Fish & Game, and EPA enforcement of such things as the new environmental law the voters just confirmed; apparently closing the State Parks to fund enforcing the new law would be OK with the voters based on the election, but really you could eliminate the entire Resources Protection budget and not make a dent in the total needed cuts;
  • 5.7% of 2009-10 spending was for debt payments which will go up in future budgets and you can't do anything about it;
  • 2.1% of 2009-10 spending was for capital outlay - buying or building stuff that has a usuable life of several to many years; that would include things like replacing the 1970 payroll system and other squandering of tax money; and
  • 7.1% is everything else which includes the court system, the various elected official's offices, property tax relief, and a myriad of other things state and local government have to do and which was cut 42.5% already.
The Republicans Deliberators could join with Democrats to approve a $20-$30 billion tax increase. But that won't have to happen because Governor Moonbeam and the Deliberators have a voter mandate to balance the Magic Kingdom's budget with fairy dust, and they can do it on time since it only needs a majority vote now. Yeah, sure, good luck with that.

Friday, October 22, 2010

The Great California Continuing Slump

Despite whatever statistics you may have read this week about new weekly unemployment claims nationally, today the government released the state and local jobs data for September showing that California continues to lose jobs.

This confirmed the one meaningful weekly claims statistic reporting that as of October 2010, the number of people reported working in jobs covered by unemployment insurance in California is at the lowest so far in The Great California Slump - 1,177,076 covered jobs have disappeared from our economy since October 2008.

The most job losses during the current period (a) continue to come from the construction sector and (b) now are showing significant layoffs in the public sector. And we know this will get worse as schools, state, and local government layoffs rise.

Economists have been projecting that in the United States no "double dip" will occur in The Great Recession. That may or may not be true, but no doubt should exist that California will experience a "Continuing Slump" made up of a continuing downward trend with minor changes to the slope which can be seen from this graph (click on the graph to see a larger version): offers two definitions for the word "slump." The first is "to decrease or fall suddenly and markedly" which is what happened to California's economy in 2008-09. The second is "to decline or deteriorate" which is what happened to California's economy in 2010 and will continue to happen into 2011. But beginning in 2012 we likely will see a trend matching 2009.

I set up this blog to ruminate about a variety of important issues facing California. It was not the intent to focus almost entirely on the collapse of California's economy and the great failures of those in our State government. Unfortunately, since May 2009 42 posts here concern what I term is The Great California Slump and its corresponding national event The Great Recession (see the list at the end).

It seemed necessary to focus on California's economy because by mid-2009 it became apparent that the State would not be able to address any issues until its economy recovered.

It also became apparent in mid-2009 that even in a "non-election year" that members of the Legislature and The Gubernator were so locked into ideology and so fearful of entrenched powerful economic interests that nothing was going to be done to deal with the State's financial crisis resulting from The Great California Slump.

Finally, it also became apparent that nobody in a State political job seemed willing to describe the depth of the economic collapse, admit the likelihood that there will be no economic recovery in California before  2020, and design a course for the State government, local government, and the State's school system to prosper. And except for "other" party candidates running for office, candidates are not telling Californians what's wrong and what needs to be done with schools and state and local government beyond ideological platitudes.

Yes, a couple of columnists and a few bloggers have expressed concerns about the broad details. For instance, Sacramento Bee Columnist Dan Walters pointed out last November:  "Conservatively, then, California is probably more than $600 billion in debt."

As I noted then, the taxpayers of California are on the hook for about $48 billion a year in principle and interest payments on debt. This is a number that, relative to the General Fund angst we go through every year, is not much less than the $56 billion the State collected in Corporate and Personal Income Tax in the 2008-2009 fiscal year and is somewhat more than all the State and Local Sales Tax Revenue collected in the 2007-2008 fiscal year - $31 billion.

Now, the press is starting to report in news stories that the much-described General Fund budget deficit problem is only the tip of the iceberg. Today the San Francisco Chronicle informed us of a report from the Legislative Analyst's Office entitled California's Other Budget Deficit: The Unemployment Insurance Fund Insolvency which let's us know information about the "off the books" growing debt in the State Unemployment Fund discussed here several times beginning in May 2009, but which is now officially acknowledged in part as follows:
The UI Fund Is Currently Insolvent. The UI fund became insolvent in January 2009 and ended that year with a shortfall of $6.2 billion. Absent corrective action, the fund deficit is projected to increase to approximately $20 billion at the end of 2011 (Employment Development Department [EDD] will soon update these projections). During 2009, the state paid about $11.3 billion in benefits to workers while collecting only about $4.5 billion from employers. This recent spike in benefit costs is due to the recession, which resulted in more workers than ever applying for UI benefits.

Federal Loan Supports Benefit Payments With Interest Costs to the State. Since January 2009, EDD has been obtaining quarterly loans from the federal government to cover the UI fund deficit. These federal loans have permitted California to make payments to UI claimants without interruption. Generally, loans lasting more than one year require interest payments. The federal American Recovery and Reinvestment Act (ARRA) of 2009 provides temporary relief to states from making interest payments on UI loans through December 31, 2010. With the expiration of these ARRA provisions, EDD estimated in May 2010 that California could owe about $500 million in September 2011 and would face growing interest obligations in the out year
Of course, this is just some small part of the debt Walters was discussing.The Chronicle regurgitating the report notes:
The Democratic-controlled state Legislature enacted benefit increases in 2002 that raised the maximum weekly payment from $230 to $450 - a change they were able to make by a majority vote.

But Democrats lacked the two-thirds margin required to increase the employer contribution.

The fund became insolvent in January 2009 and ended that year with a $6.2 billion shortfall....
The report outlines the options available to the Legislature which would involve (a) decreasing benefits which the majority Democrats won't do or (b) increasing the unemployment insurance rates which the Republicans will block. But that's ok, because the federal unemployment insurance loans come with fully enforceable terms that recognize that for three decades California employers have not been paying enough into the fund. From the report:
Employers would face serious long–term consequences if the state fails to address the underlying problem that resulted in this borrowing of federal funds for the UI system. Federal law includes provisions to ensure that a state does not continue to incur loans over an extended period. Specifically, if a state has an outstanding loan balance on January 1 for two consecutive years, the full amount of the loan must be repaid before November of the second year or employers would face higher federal UI taxes. (The current 0.8 percent federal tax would increase each year in increments—starting with an increase of 0.3 percentage points—until the loan was repaid.) Once the fund reached solvency, the annual federal UI tax rate would once again drop to 0.8 percent. As shown in Figure 5, employers could face their first tax increase as early as 2012, which would result in an increased annual cost of about $325 million to employers. Absent corrective action, the federal tax would continue to increase incrementally each year to a maximum of 6.2 percent, resulting in increased employer costs of approximately $6 billion annually. We note that even this $6 billion tax increase would not be enough, at this point, to address the insolvency problem and cover the projected fund deficit. These additional federal administrative taxes are applied to the principal balance of the state’s federal UI loan.
That would, of course, make California an undesirable place in which to employ people. And since this will happen unless Congress let's us off the hook, that is a major problem which legislators are promising to fix right after they balance the 2010-11 current budget and the 2011-12 budget that begins next July. Don't hold your breath.

On the other hand, the State pension funds are discussed in great detail by the candidates for office and the public. Changes have already been approved to reduce pensions for new State employees. Everyone wants to solve this problem with the public employees. This is politically safer to address as opposed to the problem with private employers who have not paid enough into the unemployment fund for 20 years and don't want to pay enough in the next 20 years or cutting unemployment benefits for private sector employees by 40%.

It's good to address that public employee pension problem. So now we can avoid maybe having to worry about the year 2030 and focus on the years between today and 2020. You see, the Business Insider recently announced:
Here's a shocker: The most immediate state pension crises aren't in New York or California. They're in Middle America.
You see someone actually did a study. It was published by the Kellogg School of Management or Northwestern University. Someone reasonably smart (not a politician) went to a great deal of work to produce that study which discovered that if policy changes aren't made the pension funds of our many state governments will be bankrupt in the following years:
  • 2018: Illinois
  • 2019: Connecticut, Indiana, New Jersey
  • 2020: Hawaii, Louisiana, Oklahoma
  • 2022: Colorado, Kansas, Kentucky
  • 2023: Alabama, Michigan, Minnesota and Mississippi
  • 2024: Maryland, Pennsylvania, South Carolina and West Virginia
  • 2025: Missouri
  • 2026: Maine, Massachusetts and New Mexico
  • 2027: Montana and Rhode Island
  • 2028: Vermont
  • 2029: Arizona
  • 2030: Arkansas, California, Ohio, Wyoming
  • 2031: South Dakota
  • 2032: Nebraska
  • 2033: Virginia, Washington
  • 2035: Delaware, Iowa, Tennessee
  • 2036: Utah
  • 2037: Texas
  • 2038: Wisconsin
  • 2039: Oregon
  • 2041: North Dakota
  • 2043: Idaho
  • 2047: Georgia
  • Never: Alaska, Florida, Nevada, North Carolina and New York
So you have to give credit to our Gubernator and our Legislature and the candidates for state offices this year. They all agree that the important fiscal issue facing California government this year if not ten years ago is to solve that pension crisis facing us in 2030.

I can't wait until we find out whether it's going to be Former Governor Moonbeam who deserves the name or the overpaid corporate bigwig who brought us Teletubbies (no, she did not invent eBay or even make it a success). I'm sure either can find music entertaining their particular audiences to play on the Gubernatorial fiddle while California continues its slumping.
Here are links to the previous 42 posts on The Great California Slump and The Great Recession:

Saturday, October 9, 2010

Californians Committing Fraud Because We Must?

I'm not intending to pick on the Gubernator (my preferred spelling) as everyone who participated in the compromised budget (yes, I meant compromised) approved this week accepts this, but from the LA Times here's how our State leaders think:
Administration officials said many of the cuts announced Friday would be made in ways intended to minimize the effect on people who rely on state services. A $366-million cut to CalWORKS, for example, will be covered by an advance from the federal government that the state hopes it will not be required to pay back, said Ana Matosantos, Schwarzenegger's finance director.
In other words, the proposal would be termed "fraudulent" except that terms means "having the intent to deceive." In fact, these folks know they aren't deceiving anyone. If  what you're doing is taking money under false pretenses, do you really want to tell the press. Apparently so.

What's depressing is that it completely reflects how the Legislature "closed the deficit." Even if the deficit number itself was not the fraud it is, the budget process was.

I suppose it isn't like these "leaders" had a choice. If they hadn't found the votes the State soon would run out of money. With no budget, its ability to borrow would be severely crippled. The California Constitution says the budget was to be adopted June 15. But hey, that deadline has been met only five times in the last 30 years. So the simple fact that this is the longest the State has gone in a fiscal year without a budget isn't what made them act. The likelihood of running out of cash was the driving force.

Below is a screenshot from the document they presented before the voting:

The "Starting Problem" of a $17.9 billion deficit is a fraudulent number. The real number is more like double that figure. But even if we accept it, the problems buried in the other numbers are beyond imagination. Well, apparently not beyond imagination, as somebody has imagined this.

The silliest one is the "Federal Funds" item - $5.3 billion which is double any real possibility. The Sacramento Bee reporter who attended the presentation noted:
Presentation notes, in italics, "Still more work to do in Washington."
Yeah, right.

Expenditure reductions include interesting things such as reducing prison inmate medical costs by $820 million, a function completely controlled by a federal receiver because the State wasn't spending enough. The federal receiver must be shaking his head in wonderment.

The additional revenue portion of the document says:
More that half of this, $1.4 billion, is from the Legislative Analyst’s revenue forecast, which was $1.4 billion higher than the Governor’s May Revision – three months into the fiscal year, this additional revenue has already been realized.
That would be fine if it were a true number. But reality is that the Legislative Analyst in May predicted that revenue from income, sales and corporate taxes would come in $1.4 billion higher for the entire fiscal year of 2010-11.

In fact, the Controller has not publicly issued revenue numbers for September, but for the first two months sales tax data indicates a stagnate economy at best. Corporation tax revenues were down and Personal Income Tax Revenues year-over-year were flat.

Like last year only more so, much shifting of funds and delays in making payments is buried in the budget. More school districts this year will be borrowing against promised but delayed state revenue owed to them. Money will be wasted on interest. And in some cases, the state is nearly five years behind in payments owed to schools.

Presumably in January 2011 a new Governor and new Legislature immediately will face making revisions in this budget and trying to figure out how to deal with an even worse situation for 2011-12 without committing fraud.

Good luck with that my fellow Californians.

Friday, August 20, 2010

The sky is falling; California might have to pay with IOU's...again.

As federal and state regulators shut down four banks Friday, the State of California is not looking so good either.

This week the California Supreme Court allowed the Gubernator to order 144,000 state workers to take three days of unpaid furloughs each month. State Controller John Chiang said that the state is running out of cash and might begin issuing IOUs within two weeks because the Legislature has not adopted a budget for the fiscal year that began July 1.

"I must be clear that this year's looming cash crisis is fundamentally different than last year's," Chiang explained in aa speech Wednesday. "Importantly, the fiscal crisis we face this year is 100 percent political, and the only thing standing in our way is the absence of leadership."

Uh, someone should have commented it's always been political, John. We have a mostly inexperienced Legislature because of voter mandated term limits and the voters mandated a two-thirds vote in both the Senate and Assembly to approve a budget knowing the Republicans would likely always hold slightly more than a third of the seats in each house. It's an election year. It's politics. We don't have a State budget and we probably won't have one until after November.

That's the situation in Sacramento. Meanwhile, back in reality the federal survey data for July came in and according to it, we lost 25,102 jobs and added 89,916 to the workforce showing a "seasonally unadjusted" unemployment rate of 12.8%. During the four weeks of July, the Employment Development Department reported that 314,142 initial unemployment claims were filed compared to the 155,188 filed during the same four weeks in 2006.

Looking at the actual number of people who have jobs as indicated by the federal survey and the EDD report, we can establish that the job loss since the 3rd quarter of 2008 looks something like this and we can project a trend (click on the graph to see a larger version):

Unfortunately, the state's economy has bottomed out which means State General Fund revenue hasn't bottomed out.

It appears we will have lost 1.3 million jobs by June 2011 resulting in further loss of income and sales tax revenue. So what on Earth makes anyone think they can project a budget that doesn't involve "slash and burn" cuts to schools, welfare, and health care and significant tax increases?

Or is the plan just to sit back and run out of money? Like we have in prior years.

Wednesday, August 18, 2010

Taxing the "rich" and "not-rich"

The airwaves and blogosphere are filled with a deluge opinion flowing around the expiration of "The Bush Tax Cuts for the Rich." Either we need that tax money to reduce the deficit or we need the rich to keep the money so their investments will help the economy will recover. We are assured the sky will fall if the tax code returns to the way it was in the 1990's.

The debate around this subject seemed too much like specious campaign rhetoric to ignore. Most certainly, how the federal income tax is structured will be of importance to everyone. But what are the facts underlying this rhetoric? And if there is a problem, how would I solve it?

The Expiring Tax Policies

Of course, the facts are very different from the debate. A number of elements are involved in the tax code changes that expire December 31, 2010. The most obvious involves the rate tables published in the press and online as follows:

Table 1
If the rate tables in Table 1 by themselves don't confuse you, nothing will and you don't need any help with the issue. Since income steps are not the same on each table, I don't know how you could not be confused.

Beyond the differences in income steps between plans, the "taxable income" brackets shown are not your income. Even if all your income is taxed normally (for instance you don't get any capital gains tax breaks), at a minimum you can take the standard deduction and get the per person exemptions. The total of those on your return represent tax free income as follows (ignore the "My Plan" line, we'll deal with that later):

Table 2
Ok, so the confusing tax rates in Table 1 aren't applied until the income shown in Table 2 is deducted. Then, if you add in the fact that there is a Child Tax Credit which you can deduct from the taxes you owe but which will drop from $1,000 per child to $500 per child if the 2011 plan goes into effect, things get even more confusing.

I had to spend time with a spreadsheet to do a little comparison. I assumed certain levels of taxed income, which is gross income less all those deductions, adjustments and exemptions and I ignored the many special rules that apply to some people. I then determined the tax due and deducted the applicable "Child Tax Credit." I discovered this (again ignore "My Plan" which will be discussed below):

Table 3
If the "Bush tax cuts" 2010 Plan expire at the end of this year, the effective tax rate for a couple who are taxed on $1,000,000 of annual income will jump from 32% to 36% and the rate applied on more taxable income above that will be 39.6%. On the other hand, a couple with two children who are taxed on $20,000 of annual income will see their effective tax rate jump from 0.8% to 10.0%, something not regularly pointed out in the noise in the press and on the web!

Let's deal with the truth here. No one is going to be convinced that the loss to taxes of $153 a month would not be a problem for a couple trying to support two kids on $3,875 a month (remember one must add $26,000 in standard deduction and exemptions to that $20,000 taxed income). And I doubt that one is going to be convinced that a family taxed on $85,500 a month (yes, I know they would have had itemized deductions far in excess of the standard deduction, but this is just an example) would suffer from the loss to taxes of $3,285 a month.

There is a dilemma facing Congress. Simply allowing the "Bush Tax Cuts" to expire is not the best policy option, nor is it even rational, as it would:
  • increase the rate structure in a recession,
  • reduce the Child Tax Credit by $500, and
  • restore the marriage penalty.
On the other hand, it would be nearly impossible to get enough votes to adopt the Obama plan because of the reluctance to let the tax rate increase on the wealthy. "My Plan" would be politically feasible.

My Plan

"My Plan" would be to let the old rate table return and let the extra $500 child tax credit go away. In other words, let the "Bush Tax Cuts" expire.

Instead of arguing over those rate policies, let's triple the exemption for the filer (the "Yourself" box on the 1040 form) from $3,650 to $10,950, double the exemption per additional person ("Spouse" and dependents) from $3,650 to $7,300, and index that credit to the CPI for the future, a policy that has been needed for years.

Yes, "My Plan" would increase the tax due from $14 a month to $22 a month on the lower income family with two kids. But keep in mind that they have to earn more than $51,550 a year to have any taxed income. It seems like $8 a month is a reasonable amount to collect from such a family to help pay for the wars in Afghanistan and Iraq. The family of four taxed on $1,000,000 would have to pay an increase of $2,683 a month.

"My Plan" would, however, actually drop the taxes paid by the hurting middle-class taxpayer who pays taxes on about $60,000 a year (again that family of four must earn more than $51,550 a year to have any taxed income, so we're talking about a family that makes $111,550 a year). This economic group would gain $150 to $180 a month to spend or save beginning in 2011. Likely they will spend at least two-thirds of that gain. Increased spending will boost our economy.

Every member of Congress should be able to vote in favor of it, unlike requiring a vote on a new tax table. What's not to vote for, since the option of doing nothing will represent higher taxes. Well, yes, we do have the deficit and economy problems. Fortunately "My Plan" has a second part to do more than stimulate increased consumer spending.

My Plan Part 2: Tax Credits

If we want to use tax policy to deal with the American economy, deficit,  and that high tax rate on those with higher incomes, let's consider instituting three tax credits:
  1. Institute for businesses an Investment Tax Credit for tax years 2011 and 2012 with a carry over of unused credits into 2013 and 2014, up to a maximum total of $120,000, and only on purchases of new business equipment and rolling stock manufactured in the United States.
  2. Institute for businesses an Employee Expansion Tax Credit for tax years 2011, 2012, and 2013 equal to the amount paid on the employers' share of Social Security (FICA) on jobs newly created and continuously filled for more than six months (compared to the September 2010 reported positions).
  3. Institute for businesses and individuals a Newly Constructed Building Purchase Tax Credit  for tax years 2011 and 2012 of $5,000, allowable on purchases of residential and commercial buildings constructed during the period of 2008-2011.
We are constantly hearing from the right that those with the higher incomes invest in our economy and increasing the upper bracket tax rate by 4.6% will discourage investment. If those paying taxes in the highest income tax bracket are providing capital for investment in the American economy, they will be the beneficiaries of all three credits as they are passed through to investors. If they aren't actually investing in the American economy, they'll just have to forgo what most Americans would think are luxuries.

Even workers will benefit from the jobs created as a result of these credits and some will benefit from the Newly Constructed Building Purchase Tax Credit on homes they purchase.

On the other hand, the tax credits do represent a loss of tax income which increases the deficit. However, the right would argue that in the long term they will produce more economic activity which would result in increased tax income which would reduce the deficit.

 Growing Our Economy

While I believe my proposals would speed up our economic recovery, that would only be in the short term. As I've posted before, Americans will still need to address what they expect out of their economy.

Between outsourcing and automation we have used our American ingenuity and initiative to put ourselves out of work. We need to find a way to use all our human energy - mental and physical - to create wealth that returns back to each of us to meet our material needs - not just basic needs but a level of "middle-classness" needs, whatever that means.

The economic model of the second half of the 20th Century isn't going to work in the future in my opinion. Being constantly at war from 1947 to today isn't a sustainable pattern to follow. Relying unnecessarily on other nations' natural and human resources is foolishness. Allowing a few to divide our energies into squabbles over meaningless economic and social ideologies just diverts attention away from problem solving.

If my granddaughters are to be assured that the energetic use of their skills and talents will give them that middle class economic status that I "enjoyed," Americans must be even more socially aware, economically innovative, collectively creative, and individually adaptable during the next 60 years than we were from 1947 to 2007.

That shouldn't be a problem for Americans as we transition from the Information Age to whatever "Age" the future brings. Right?