Saturday, March 17, 2012

The "compelling, once-in-a-lifetime chance to invest directly in the improved education of California's children" tax increase initiative

Recent news reports in California's major newspapers indicate that there is one, maybe two, rarely three, tax increase initiatives circulating for signatures worth mentioning in stories regarding the State's budget problems. Reading those stories, you would never know there are nine (9) tax increase measures circulating right now. All have been discussed in previous posts.1

Now we read in the press that Governor Jerry "Moonbeam" Brown and the California Federation of Teachers (CFT) have negotiated a compromise that could permit a jointly sponsored initiative rather than continue with their current two competing initiatives, which are the ones that have received most of the press coverage.

The compromise measure would basically be Brown's initiative but with the sales tax increase dropped to ¼% while at the upper end of the income tax the increase would be higher, similar to the CFT initiative. The sales tax would still expire in 2016, but the income tax hike would be extended two more years. It has been submitted to the Attorney General.

Moonbeam is getting a lot of criticism about this compromise because it significantly shifts the tax increase proposal into the "class warfare" camp of taxing only the very wealthy, the so-called 1%. Moonbeam's gyrations with the CFT are not the primary subject of this post, however.

We Californians are being diverted from considering our state's problems. Most of the time, debate and discussion found in those news stories (as well as the comments about those stories on various web sites) all seem to be occurring between ideologues who either...
  1. want to eliminate all government or
  2. want to solve all social problems by providing more money to government.
Lost in the midst of this rhetoric about tax initiative proposals are...
  1. the goals to be accomplished with the additional money,
  2. what period of time the additional tax levies will need to be in effect to accomplish those goals, and
  3. the potential impact of the tax increase alternatives on real people and California's economy.
What one might think are the critical issues remain completely undebated and under-reported, lost in spin, with Moonbeam's camp being the best at spinning.

The fact is that Moonbeam and the CFT simply want money for the State General Fund to patch the significant holes that resulted as a side effect of The Great California Slump, which began with The Great Recession, created a significant loss of jobs in the private sector, and has destabilized the California economy.

Giving the Legislature and the Governor more tax money to spend however they see fit doesn't seem like a very good way to address The Great California Slump. From 1997-98 through 2010-11, cumulative disbursements from the State General Fund have exceeded cumulative receipts from revenue by a whopping $46.7 billion. This $46.7 billion deficit spending was approved at the time by the Legislators and the Governors. It is disturbing because we could have just as easily had a "rainy day fund" of $27± billion without any tax increases in the past four years.2

It's difficult to muster any positive feelings for a tax increase that doesn't specifically address improving California's economic future. Educating California's children for a 21st Century economy is the one clear way we can improve things for future generations.

One of the initiative measures being circulated for signatures right now was developed by activist heiress Molly Munger working with the California PTA. It receives far less press attention than the ones proposed by Moonbeam and the CFT even though the Sacramento Bee Editorial Board said:
Munger makes a compelling case that this is a once-in-lifetime chance to invest directly in the improved education of California's children. If her timing were different, and if Munger had first attempted to get her proposal passed through the Legislature, we'd be tempted to support it.
The Bee's Editorial Board knows no one could get any tax measure through the Legislature. It also knows Munger filed her measure before Brown. But they had to come up with some excuse to say that it represents "a compelling case that this is a once-in-lifetime chance to invest directly in the improved education of California's children," but....

The case Munger makes is compelling because her measure is far, far better than Governor Brown's precisely because Munger's focuses on improving the education and hopefully the economic potential of the next generation.

Munger's measure is complicated but carefully crafted. Here's a summary of how it would work if adopted:
  1. It provides for increased income taxes beginning January 1, 2013 and, unless renewed by the voters in November 2024, ending on December 31, 2024; it is the only measure circulating now that provides revenue beyond 2016 and still provides an end date, 2024, when the voters can reexamine whether its been effective and whether it is still needed; virtually every economist says that the economic dislocation in California created by The Great California Slump will last well beyond 2016.
  2. In a single concession to the political power structure of the state, for fiscal years between 2012-13 and 2016-17, it allocates 30% of the funds resulting from the tax increase to a fund from which school bond debt can be paid; the net effect is to lessen the pressure of The Great California Slump on the General Fund by whatever that 30% revenue represents, which Munger hopes the Legislature will use to prevent further drastic cuts in programs that provide food and medical care to children.
  3. The remainder of the funds (which after 2016-17 means all of the funds) are to go into a California Education Trust Fund (CETF) to be allocated 85% to K-12 school funding and 15% to early childhood education.
  4. The Trust Fund is to be supervised by a Fiscal Oversight Board; the measure states: "The members of the Board are the State Controller, State Auditor, State Treasurer, Attorney General, and Director of Finance. The Fiscal Oversight Board shall be responsible for ensuring that CETF funds are distributed exactly as provided by this Act and are used solely for the purposes set forth in this Act"; note that no member of the State Legislature nor any appointee of the Legislature is on this Board, a fact which is not lost on the politicians.
  5. Recognizing that in California income tax revenue is subject to wild swings up and down, the measure provides for a mandatory five year averaging of growth in income tax revenue to determine the increase in each year's revenues to be available for spending; no matter how much pressure the Fiscal Oversight Board may get from various constituencies, huge spending increases because of one-time revenue increases will not be possible, a fact which is not lost on the politicians or special interests; this would avoid the problem of the new revenue being spent hiring too much staff and creating too many special programs in years when income tax revenue is very high, thereby creating in the lean years the problem of having to lay off that staff and ending the programs.
  6. The K-12 monies will be distributed to school districts, county offices of education, governing boards of independent public charter schools, and the governing bodies of direct instructional services provided by the state (such as the California Schools for the Deaf and the California School for the Blind) based upon the number of students they teach; the funds must supplement state, local and federal funds committed for public K-12 schools and early care and education as of November 1, 2012, and shall not be used to supplant or replace the per capita state, local or federal funding levels that were in place for these purposes as of that date (there is a provision for a CPI adjustment and an exception for an overall reduction in federal funds).
  7. The measure provides complicated, but concise and clear, provisions for establishing and funding an Early Childhood Quality Improvement and Expansion Program generally under the supervision of the elected California State Superintendent of Public Instruction, not the Legislature.
  8. In contrast to the projected budget deficits of around $13 billion a year, it is conservatively estimated that the measure will generate about $11 billion the first year, increasing over time; from a logical standpoint this compares favorably against the other measures that would generate between one-third to two thirds of that amount, at a minimum at least $4 billion short of balancing the budget, while claiming in Moonbeam's measures, to guarantee "solid, reliable funding for schools, community colleges, and public safety while helping balance the budget and preventing further devastating cuts to services for seniors, middle-class, working families, children and small businesses"; Munger's measure makes no wild claims. 
  9. Detailed restrictions to avoid siphoning off money for uses other than education, including prohibiting "lending" of the funds" and detailed audit provisions including public review are included in the measure, all under the oversight of the Fiscal Oversight Board.
Munger's measure does not offer the same emotional content as the CFT measure or the Moonbeam-CFT compromise measure. Here is a comparison of impact of the measures on various levels of taxable family income (meaning a two-earner family):

As can be seen from this chart, the Brown-CFT Compromise measure would increase by a whopping 27% taxes paid by a family with a taxable income of $10,000,000. It would also increase by about 3.5% taxes paid by a family with a taxable income of $14,642. And it would increase by about 1% taxes paid by a family with a taxable income of $136,118.

Munger's measure measure would increase by "only" 18% taxes paid by a family with a taxable income of $10,000,000. It would not increase taxes paid by a family with a taxable income of $14,642. But it would increase by about 14% taxes paid by a family with a taxable income of $136,118 because it retains a progressive income tax model that requires everyone to share in the support of education.

The difference between the measures is one appeals to the idea that we can simply tax the rich to solve our problems, an idea that has a strong emotional appeal right now. Many want to ignore the idea that there is a limit on how much California can attempt to tax the so-called wealthy "1%". The simple fact is that companies can move their "headquarters" out of California. And if their executives and major investors move their "primary" residences out of California (keeping both the Carmel "beach bungalow" and the Tahoe "cabin", of course), those taxable profits from future high tech IPO's would leave California also.

It is dangerous when a politician like Brown chooses to compromise with those selling the emotions of class warfare. He could have backed Munger's measure as does the California PTA.

I describe Brown's approach as The Moonbeam Complex Free Up General Fund Money and Fix Nothing Tax Increase Initiative because that is what it is. Yes, some of the money will be applied to education and public safety, but much of it will free up State General Fund monies for the Legislature and Governor to play with. Because the taxes expire in 2016, they offer no potential solution to problems resulting from The Great California Slump. And in terms of any meaningful policy goals, Moonbeam's measure offers nothing.

California voters have good reasons to approve Munger's measure as it represents a thoughtful approach to the future of our State. They should reject any of the measures carrying Brown's endorsement.

1This post is a followup to a series of posts beginning in December 2011 on tax initiative proposals:
2Here is the past fourteen years of the State General Fund cash disbursements and cash receipts from revenues (from the June Year End Statements prepared by the State Controller):
Apparently, we simply cannot keep from spending more than we are willing to pay in taxes. And yet, in hindsight we could have been responsible with our tax money during that period leaving us with a sufficient rainy day fund that, without any tax increases, could have carried us through 2020, something like this:
Yes, that's hindsight. But the conservative right has been given their anti-tax argument handed to them on a platter by irresponsible Legislators pandering to constituencies, the latter being us.