Water Bond Makes Bad Budget Worse

On November 4th, the State Legislature passed an $11 billion water bond. This action has been widely described as an historic achievement. Unfortunately, this is true for all the wrong reasons.

This bond was crafted behind closed doors, never received a public vetting, and was passed on the fly in the middle of the night by legislators who lacked an adequate analysis of it. It brings our debt burden to historic new levels. And, for the first time, it requires the public to finance half the cost of new dams and reservoirs benefiting private interests.

By passing this bond, the Legislature is flirting with financial disaster. Already, the state is unable to pay for services demanded by Californians. We’ve just gone through three horrific state budgets to close a $60 billion gap. And, more troubles lay ahead. We face an $8 billion gap next year and a $15 billion gap after that. Servicing the debt on an $11 billion water bond will make our bad budget situation worse.

For more information, check out my remarks during the debate about the water bond on the Assembly Floor.

IHSS "Reform" Disaster

On November 28th the Assembly Budget Committee convened an oversight hearing on the Schwarzenegger Administration’s botched implementation of its own proposals to reduce fraud the governor claims is in the In-Home Supportive Services (IHSS) Program.

IHSS provides medical, nursing, and day to day living assistance to 460,000 elderly and disabled in their own homes. It has proven itself a less expensive and more effective alternative to nursing home care while enabling individuals to live with dignity in their community. Please watch the video to see how this program is needlessly under threat. That’s why I am pushing through emergency legislation to prevent the imminent collapse of the IHSS program.

BNRT—Not a European Vacation

The proposal by the Commission on the 21st Century Economy (COTCE—rhymes with “gotcha”) to scrap the California tax system and replace it with the Business Net Receipts Tax (BNRT) is riddled with problems and full of questions without answers. It begs the question—how stupid do they think we really are?

Few people understand how the BNRT works and no one knows how it will impact California. Some compare the BNRT with the European Union's Value Added Tax (VAT). That’s like saying the Oakland Raiders and Manchester United both play football.

On the surface, both tax systems sound similar. The proposed BNRT would be imposed as a percentage of a business’ gross receipts from the sale of goods and services, minus the business’ purchases of goods and services from other businesses (which have already been taxed). A VAT is a tax on manufacturers at each stage of production on the amount of value an additional producer adds to a product. This cost is typically passed on to the consumer in the end.

A key distinction between the VAT and BNRT lies in the fact that California is a state, not a sovereign nation. So, the BNRT lacks a critical element of Europe's VAT—the border adjustment. The United States Constitution prevents California from implementing a border adjustment because that interferes with interstate commerce, which can only be regulated by the federal government.

This creates an enormous problem for California businesses. Europe’s VAT system ensures that products made in Europe are taxed at the same rate as products made abroad by placing the VAT on products entering Europe and rebating the tax for those products leaving Europe. However, under the United States Constitution, businesses without a nexus to California cannot be taxed by California. Thus, California products will be subject to the BNRT while products made elsewhere will enjoy a competitive tax advantage.

The BNRT’s problems don’t end there. Most importantly, the BNRT reduces incentives to create jobs in California.

The Commission’s proposal provides a tax deduction for payments to independent contractors, but not for employee wages. It’s almost as if the Commission was trying to find a way to punish California workers. Under this proposal, California businesses would be taxed for keeping employees on their payroll. The logical result is that California businesses will turn to out-of-state labor contractors who hire workers in California and then contract them out to California businesses. Thus, Californians will have even less stable employment and we would see fewer jobs created here.

Adopting the untested BNRT proposal requires blind faith in the Commission’s promises that it will somehow benefit California, despite all the evidence to the contrary. It’s like quitting your dull, but reliable job because a late night commercial promises you can make $100,000 working from home.

Who benefits from this proposal? California workers don’t benefit. California’s small businesses don’t benefit. California corporations don’t benefit. Any benefit to California’s taxpayers is entirely speculative. The only certain beneficiaries from this proposal are out-of-state businesses, large, multi-state or multi-national businesses, and out-of-state labor contractors. Was this really the purpose of the Commission on the 21st Century Economy?

Many economists love Europe's VAT and extol its benefits to the European economy. But don't be tricked into believing that the proposed BNRT will bring these or similar benefits to California. The greatest lessons Californians can learn from Europe regarding the BNRT are the lessons learned the hard way in the casinos of Monte Carlo.

The Volatility Monster—Be Afraid, Be Very Afraid

As Californians suffer through the worst recession in decades, the Commission on the 21st Century Economy and the governor are seeking massive tax cuts for the super rich. How can such an outrageous proposal be sold to unemployed, underemployed, and underpaid Californians? By calling this giveaway a “reform” to our budget crisis.

The Commission and governor suggest that the source of our budget woes is a sinister monster called--(cue scary music)--“revenue volatility.” As their story goes, if we slay the revenue volatility monster all our budget problems will disappear. So we have no choice but to give very rich people jaw-dropping tax cuts.

Their rationale is that Sacramento cannot responsibly manage a one-time spike in revenues because the revenue volatility monster tricks the Legislature into committing to long-term spending of money the state does not have, thereby condemning California to years of budget stalemates, and tough choices between higher taxes and painful spending cuts. The inference is that these tough choices can be avoided if the state changes its tax structure to eliminate the volatility monster.

Here is the real volatility problem. Very rich people pay a lot of income taxes when they make lots of money in good economic years. Their income taxes go down in recessions because they earn less money. Equity markets, stock options, bonuses, and capital gains depend upon the health of the economy, and with the economy, are volatile. Volatility is not limited to the State of California; we have seen the same volatility across the nation as the richest of the rich have begun to accumulate wealth and income at proportions not seen since the 1920. As a result of accumulation of income in a few hands, the state collects more in income taxes because our personal income tax (PIT) is progressive.

About half of California's General Fund revenues come from the PIT, a progressive tax which increases as amount of taxable income grows. Although the PIT revenues have gone up and down throughout the years, since 1989 it has increased by an average annual rate of 6.7 percent. This outpaces the growth of other taxes, such as the sales tax. Most economists support a progressive tax system – even Adam Smith praised its merits in The Wealth of Nations. And, almost all tax systems in the world contain progressive elements.

The Commission’s report proposes reducing volatility by reducing the tax burden on the wealthy. The Commission proposes flattening the PIT tax structure by reducing the number of tax brackets from six to two. The new tax rate would be 2.75 percent for taxable income up to $56,000 for joint filers ($28,000 for single) and 6.5 percent for taxable income above that amount. Under this proposal, a person struggling to eke out a living on $28,001 will pay the same rate (6.5 percent) as someone earning $2,800,001. If we just don’t tax upper incomes much, voila—we slay the volatility monster.

The benefits to the wealthy don't stop there—the higher income earners still get the benefits of mortgage deductions, property tax deductions and charitable contribution deductions. On the flip side, the Commission’s report recommends we eliminate child care deductions and dependent credits which benefits low-income taxpayers. For some families this leads to a tax increase—a family of four making $65,000 per year with $15,000 of itemized deductions and special credits worth $500 for child care would see their PIT liability increase by a whopping 437.7 percent

This is classic supply-side, “trickle down” economics. The Commission’s report assumes that the super wealthy and corporations which benefit directly from their proposed tax cuts will translate the cuts into lower prices and more investment. In fact, some have argued that lowering the tax rate is going to spur so much investment that overall tax revenue is going to increase. But we’ve heard that tired sales pitch before when the Reagan and Bush federal tax cuts didn’t result in tax revenue increases.

“Trickle down” economics has been thoroughly discredited. The true response to solving the volatility problem is to make sure Californians are fully employed and decently paid.

The Commission proposes reducing PIT revenues under the fig leaf of stabilizing revenues. Using this logic, if California just stopped collecting taxes, the problem of volatility would be solved forever.

VOTE YES--OR ELSE

During the last session, the Legislature worked diligently on big issues, including renewable energy, balancing the budget, and water. Unfortunately, the governor has done little to move the ball forward on these issues, other than to issue demands and now, to tell the Legislature, “vote yes--or else.”

Now, he has taken 700 bills hostage in an attempt to force a deal on a water bond benefiting some Californians, but paid for by all Californians. Something is very wrong with this picture.

The Legislature is keenly aware of the urgency of the crisis faced by agriculture, fisheries, and communities dependent on the Delta for their drinking water. During the final days of session, the Legislature came very close to passing 2 bills on water, both of which it continues to work on. One bill would set substantive policy for the Delta; the second bill would put a water bond on the ballot for voters to consider.

As complicated as the substantive policy is, the funding is just as problematic. The proposed general obligation bond for dams and conveyances burdens the state’s already over-stretched General Fund by $780 million annually. In a year when we cut billions of dollars from the state’s General Fund, decimated state services, nearly closed state parks, furloughed state employees and backed away from the state’s long-standing commitment to higher education, adding another $780 million annually to finance bond costs is fiscally irresponsible. We need the governor’s help to identify better ways to pay for this.

On October 5, the governor suggested to the Senate President Pro Tem that the Legislature withdraw nearly 700 bills now on his desk awaiting signature. The clear inference is that if they are not withdrawn, the governor will make good his threat to veto them because he has not yet gotten his way on water.

The veto power overrides the work of the Legislature which represents the will of the people. It is an extraordinary power and should not be exercised capriciously or casually. This governor, however, has repeatedly abused his veto power and threatens to do it again.

Last year, the Governor vetoed over 400 bills, 136 of them with a generic veto message, because he was unhappy after protracted budget negotiations.

Soon after, the state saw an unprecedented drop in General Fund revenues and we were forced to make billions of dollars in painful cuts to services. Public hearings were held, the Big Five met, an agreement was reached with the governor, and was passed by the Legislature. The governor promptly vetoed funding for several programs, including domestic violence shelters and HIV/AIDS prevention. A lawsuit is pending to challenge the legality of these vetoes. Legal or not, these vetoes violated the agreement between the governor and the Legislature, put the safety of many Californians at risk, and jeopardized the public's trust in the governor.

In September, the governor gave Californians another taste of how far he would go. He asked the Legislature to withdraw all bills pending on his desk so that he could evaluate what had or had not passed before deciding whether to sign or veto bills. The Legislature did not withdraw Assemblymember Cook’s AB 264, a unanimously passed bill to honor Vietnam veterans. He then vetoed the bill out of spite.

This brings us to the governor’s most recent threat to veto the bills currently on his desk. Like last year, many of the bills threatened by the governor save the state money during this dire recession. Some correct flaws in existing law or make life easier for Californians. All of them deserve serious consideration. Yet he threatens to veto them without regard to their merits because he hasn’t yet gotten exactly what he wants on water right now. Vote “yes” on the water bill—or else.

Assembly Majority Leader Alberto Torrico has announced that he's writing to the Attorney General, urging him to investigate the governor's use of intimidation to influence legislation as a form of extortion. Whether the governor’s clumsy attempt at hostage-taking is illegal remains to be seen. It may constitute misconduct and, at minimum, is an abuse of his executive powers at the expense of all Californians.

Instead of bullying, now is the time California needs its governor to step up to the plate and work cooperatively with the Legislature to find ways to solve our water problems without mortgaging our future.

Tax Reform for Billionaires

The Commission on the 21st Century Economy, tasked with crafting proposals to modernize California’s tax policy and ease the volatility of its revenues, released its final report today. Leona Helmsley would be proud.

Helmsley – a billionaire New York City hotel operator and real estate developer sentenced to prison for tax evasion – famously said, “Only the little people pay taxes.” With all the tax cuts being proposed by the Commission for big business and the wealthy, her observation will be true in California.

If adopted, the report’s recommendations – available here – would dramatically reshape tax policy in California and place the burden squarely on our already over-burdened, underpaid, and under-employed working families. These recommendations include:
• Reducing the number of tax brackets from six to two. The new tax rate would be 2.75 percent for taxable income up to $56,000 for joint filers ($28,000 for single) and 6.5 percent for taxable income above that amount;
• Eliminating the 8.84 percent corporate tax and the $800 minimum franchise tax;
• Eliminating the current 5 percent state sales tax, with the exception of the sales tax on gas and diesel fuels which would continue to be dedicated to transportation;
• Establishing a new tax, not to exceed 4 percent, applied to the net receipts of businesses. Small businesses with less than $500,000 in gross annual receipts would be exempt from this tax;
• Creating an independent tax dispute forum – This forum would provide taxpayers with a forum for resolving disputes with the state; and
• Increasing the state’s Rainy Day Reserve Fund from 5 percent of revenues to 12.5 percent and restricting the government's ability to use the reserves.

By flattening our tax policy, these recommendations coddle CEOs and billionaires while kicking California families to the curb. No wonder the Commission shut the public out of the process to complete its work in secret.

It is equally important to note what is not recommended by the report, but would have contributed to increasing and stabilizing the state’s tax base: a new carbon tax, an oil severance tax, extending the sales tax to certain services, and requiring corporate-owned real estate to be reassessed at market value on a regular basis.

California families are struggling to make ends meet. This recession has produced record unemployment, fueled massive wage reductions, and resulted in huge sales declines. Increasing the tax burden on hard-working families cannot fairly and reliably fill the huge revenue gap created by reducing income taxes on the wealthy and eliminating corporate taxes.

Tax reform decisions are too important for experimental guesswork. But this is exactly what the Commission’s report is urging. While the Commission asserts that its proposals will create a tax structure that will more reliably support state services, that assertion is unsupported by the available evidence. In fact, the Commission has thus far refused to make available to the public studies and information that form the basis of its proposals. Adopting the Commission’s proposals would be playing Russian roulette with California’s future.

Children Paying Price from Governor’s Blue Pencil Cuts

When signing the budget revision in July, the governor vetoed hundreds of millions of dollars worth of services the Legislature fought to protect.

Across the state, counties are reporting that must adapt to these cuts by eliminating positions of Child Welfare Services (CWS) workers who protect children. Consider these examples:
• Contra Costa County is holding 70 CWS positions vacant agency-wide and closing offices.
• Tulare County laid off 55 CWS workers; and
• Sacramento County is considering eliminating 212 positions in CWS.

How much protection will the most vulnerable children in California lose? Counties are only now beginning to sift through the details of how the cut will impact each local county department and then we will find out how many children will fall through the cracks.

Cost of Inaction on Corrections Reform

Anyone not prepared to support corrections reform legislation must justify that position against the inevitable cost of inaction: K-12 education, higher education, human services, and health care will pay the price if we don’t control corrections costs. They must also justify their position against the bloated inefficiencies of our corrections system which could be keeping Californians safer.

Every part of the state budget has faced enormous cuts over recent years, except corrections. In fact, the corrections budget has consistently been the fastest growing part of state spending. It is now the 4th largest area of spending, comprising nearly 10 percent of our state budget.

What does California get for its money? We spend more on corrections than any other state but we have the highest recidivism rate in the nation – approximately 70 percent. And, without experiencing a massive spike in crime, 1 in 36 Californians today is under control of our corrections system compared with 1 in 69 in 1982. Basic reforms to our corrections system are long overdue. They will save us money and make California a much safer place.

On August 20, the Senate narrowly passed ABx3 14. It saves $524 million in corrections spending by enacting various reforms to focus our incarceration system on violent offenders, including:
· Adjusting property crime thresholds for inflation;
· Changing three wobblers - petty theft with a prior, check-kiting and receiving stolen property - to misdemeanor offenses;
· Establishing a Sentencing Commission in California to establish new sentencing guidelines by July 1, 2012;
· Establishing alternative home custody with electronic monitoring for inmates with less than 12 months to serve on their prison terms or for inmates over 60 years of age; and
· Enacting a series of reforms to our parole system.

Unfortunately, this legislation lost momentum. As negotiations continue to reach a corrections agreement, where is the outrage in this debate? Failing to enact corrections reforms shows a perverse preference for putting the burden of future budget cuts on the backs of productive Californians and the working poor of our state. Failure also risks losing control of our prison system to the federal government.

After fighting tooth and nail to keep CalWORKS, Healthy Families and CalGrants this year, I encourage the advocates for these and other programs to fight for corrections reform. If we fail, it is their programs that will pay the price.

According to the Legislative Analyst’s Office, in General Fund dollars, each year we spend approximately $46,000 per prison inmate and $248,000 per youth incarcerated in California. Compare these figures with:
· $5,888 per child in K-12 education;
· $3,721 per student enrolled in community college;
· $6,612 per student enrolled at CSU and $12,756 per student enrolled in UC;
· $5,707 per child in our foster care system;
· $1,408 per participant enrolled in CalWORKS; and
· $435 per child enrolled in Healthy Families.

Is this really the kind of state you want to live in?

Governor’s Budget Signature Lands with Thud

The governor demanded more sacrifice today from working and needy Californians when he cut an additional $586 million while signing California’s budget revision.

A full list of these cuts is available through the Department of Finance starting on page 43 of this document. Most of these cuts were resoundingly rejected by the Conference Committee, after receiving days of input from the public.

A clear pattern emerges in looking at the governor’s list of cuts: it is harder than ever to be a kid in California. Among other things, the governor cut:
• $79.9 million from Child Welfare Services, which investigates instances of child abuse and neglect;
• $50 million from Healthy Families by throwing children off health insurance;
• $50 million from the Early Start Program, which provides disabled young children with early intervention services; and
• $2 million from the Student Aid Commission.

The pain does not stop there. $120 million was cut from county administration funds for Medi-Cal, making it harder for Californians to actually use Medi-Cal. All funding – about $52 million – for the Office of Aids Prevention and Treatment was eliminated. It provided AIDS prevention education as well as counseling services and community care to those living with AIDS. And, all funding for the Domestic Violence Program was eliminated – about $16 million. It provided comprehensive shelter-based domestic violence services to victims of domestic violence and their children.

People will suffer and die because of the cuts the governor made today. I know the governor will be okay. He will relax in his jacuzzi tonight and light up a stogie. It’s the rest of California that I’m worried about.

Legislature Approves Revised Budget

After a two-day marathon, the Legislature approved approximately $22.5 billion in budget solutions.

An analysis of the budget revision is available on the Assembly Budget Committee website. Two items that were part of the Big 5 budget agreement failed to pass: a $1.7 billion two-year take of local road maintenance funds and opening up our coast to offshore drilling for the first time in 40 years.

With this budget revision California will chart a new course of great, but not shared, sacrifice. Fewer teachers will teach our children. Thousands of seniors and disabled Californians will lose the care they need to live in their own homes. And, dreams of a state university education will be dashed for many Californians because it is about to become much more expensive. But, absent this budget revision, financial insolvency is days away. While these cuts are painful, the alternative is worse.

The California dream is the victim of our dysfunctional process. Californians want quality public schools, a safety net for vulnerable residents, and their coastline protected from expanded oil drilling. The tragedy is that these and other California values took a backseat to the interests of an empowered minority who shut the public out from crafting their own budget. No other budget has so clearly shown the need for budget reforms to restore the integrity of our democracy.