Terminator: Budget Reform Edition

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It includes a $12.5 billion increase in taxes, a $14.8 billion cut to education, public transportation, health care and the judiciary system and $5.4 billion in new borrowing. It offers less child credit and higher tuition to the tune of 9 percent. The 2009-10 California state budget has something for everyone, though not in a way that most Californians, Republican or Democrat, will like.
And yet, last week, when the budget passed after 100 days of deadlock, most people breathed a sigh of relief. The $143 billion budget, though far from perfect, will close the $41 billion deficit and keep California, the nation’s richest state and the world’s eighth biggest economy, from bankruptcy. It ended, at least for now, the specter of state issued IOUs. Tax refunds and public assistance payments will be paid, though they may still be delayed for a few weeks.
Californians cannot, however, afford to relax. This reprieve is only temporary. Even though the budget is now balanced, a continuation of current economic conditions, which seem more likely than ever, may create yet another budget deficit next year. The same factors that contributed to this year’s crisis are still there. If this debacle has taught us anything, it is that the state’s fundamental financial and, indeed, political model must be re-examined and in large part rewritten.
The first issue to address has to be the tax code. California depends far too much on personal income taxes for revenue. Currently, income taxes account for almost half of the state’s total revenue. The national average is in the mid-30s. Income taxes, which include taxes on capital gains and stock options, are highly unstable. They tend to follow the market in a continuous cycle of boom and bust. In good years, the state collects a windfall and uses the additional money to lower fees and increase spending.
However, a flip side exists. During bad years, the state’s revenue drops precipitously, leaving it encumbered with programs put into place during good times and a budget deficit. In many ways, the current situation is a result of not only declining income tax revenue now, but also from the last bust, when California lost billions to the tech bubble’s burst, leaving the state short on reserves. A restructuring toward sales and property taxes may help stabilize the state’s revenue stream.
In order to do this, California needs to reassess that most sacred of sacred cows, Proposition 13. Proposition 13, the “People’s Initiative to Limit Property Taxation,” passed in 1978 as part a larger pushback against taxes. It amended the California constitution to cap property taxes in the state at 1 percent of the assessed value and also limited the amount by which the tax could rise every year. The proposition has cost the state hundreds of billions in lost revenue. It has had wide ranging affects on the state’s housing market by favoring owner over buyer and on local and state government. Proposition 13 is a dinosaur of another era. As it is, it contributes to California’ chronic budget shortfalls and needs serious reform.
Proposition 13, as important as it is, is only one of many propositions passed under California’s ballot initiative system. This system allows voters to amend state law during elections. It is often touted as direct democracy, the triumph of the people’s will. It has been embraced by both conservatives and liberals to push through measures, like Proposition 13, that would be much more difficult to pass in the legislature. While the ballot system has many positives, in purely budgetary terms, it hamstrings the legislature and the governor as they try to achieve a balanced budget. The measures, which may or may not be worthy viewed independently, contribute to a piecemeal approach that harms the state’s financial flexibility.
Most of all, in order to avert a repeat of this year’s stalemate, California needs to change the two-third majority needed to pass the budget. Just two other states, Arkansas and Rhode Island, require this. The two-thirds threshold takes too much power from the center and gives it to the fringe. Our government is one that strives to protect the minority from the majority, but in the end we are a democratic system. One lawmaker should not be given the ability to hold a state of 33 million hostage. To allow this is to make a mockery of democracy.
The issues listed above are only some of the areas that need to be put on the table if California is to achieve a functional budgetary system in the long run. Our current situation is a result of often well-meaning but separately planned pieces that just don’t work well together. California needs to overhaul the entire system. We, Californians from all parties and of all interest groups, need to take a good, hard look at all of our givens. We need to reform the way we elect our representatives, the way we collect and spend our money. If we want more services, then we need to be willing to pay for it. If we want to pay less, then we must expect less. The schizophrenia needs to end. We need to reassess what it is that we want out of our government and then do what we need to do so that our government can do just that.

Mengfei Chen is a third-year international studies major. She can be reached at mengfeic@uci.edu.

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