How to fix California’s budget woes (if you really wanted to) – Orange County Register

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California’s biggest challenge in 2024 is the estimated $68 billion budget deficit. Here’s how to fix it. 

Spending has to be cut – a lot. There’s no choice. Twenty years ago while at the Orange County Register I came up with what I called the “6.2% solution” to the wild budget swings. Looking at state data, I noticed the state got into trouble whenever general-fund spending rose above 6.2% of the personal income. That’s the maximum the state’s residents can pay. Above that and budget deficits hit during the next slump.

I’ve updated the analysis periodically. The Legislative Analyst produced a similar analysis for its Feb. 15, 2023 Multiyear Assessment for the budget, although not crediting me.

On Jan. 10 Gov. Gavin Newsom will release his budget proposal for fiscal year 2024-25, which begins on July 1, including the latest estimates. For this article, I’ll use Schedule 6 of his 2023-24 proposal. The state spent 7.9% of personal income in 2022-23, a wildly high number. And it will spend a projected 7.1% for 2023-24, the current fiscal year. 

For the latter number, spending was 0.9 percentage points above the 6.2% limit. The need for a cut in the general-fund budget is 0.9/7.1% of spending, or 13%. 

Next, the LAO’s latest budget analysis from Dec. 7 estimated spending currently at $223 billion for 2024-25. A budget cut of 13% would be $29 billion. Do that for two years and we come to $58 billion. Take $10 billion from the estimated $24 billion budget reserve and we come to $68 billion.

Tax increases? Any attempt would backfire. Income taxes are already going up Jan. 1, including from 9.3% to 10.4% on the middle class and 13.3% to 14.4% on millionaires. When Gov. Pete Wilson signed a record $7 billion tax increase in 1991, revenues actually declined from $40 billion to $42 billion two years later. 

Gov. Arnold Schwarzenegger raised taxes in 2009. But as Rep. Tom McClintock pointed out the next year, “The taxes were supposed to produce $13 billion in additional revenue. But after nine months, California’s sales tax collections are down $270 million; income tax collections are down $10 billion.”

In the long term, California needs reforms that finally end the surplus-deficit rollercoaster. First, it should enact economist Art Laffer’s 5.8% flat state income tax, with no deductions except for a home. It would produce a steady flow of revenues and encourage rich people to stay here, or come back, and pay taxes again. Nine states already have flat taxes, including most recently Arizona.

Second, the Gann Limit needs to be reformed. Passed in 1978 as Proposition 4, it limited state spending to the increase in population plus inflation; with surpluses sent back to taxpayers. It was eviscerated by Proposition 111 in 1990.

But the residual Gann Limit produced the embarrassment two years ago of a nearly $100 billion surplus being used partly as tax refunds, but mostly as new spending – a nice slush fund as the governor and legislators faced re-election.

A better idea: Enact a strong Gann Limit 2.0 that caps spending at 6.2% of personal income, with any excess triggering across-the-board cuts in all departments. 

The $68 billion deficit is an opportunity to put these two reforms before voters next Nov. 5. Previous budget crises were wasted with the 1991 and 2009 tax increases; and in 2004 with Schwarzenegger’s foolish $15 billion bond from Proposition 57, a stopgap that came back to shock him in 2009.

Finally, let’s look to new Argentine President Javier Milei. He ordered an extraordinary session of Congress lasting until Jan. 31 “to discuss his controversial sweeping economic reform package,” reported the Buenos Aires Times. The reforms also would “change or scrap more than 300 regulations and rules,” including rent control.

Newsom obviously has presidential ambitions. If he wants that job, he first has to show Milei-style gumption to push into law radical reforms to restore stability and prosperity to the state budget and economy.

John Seiler is on the SCNG Editorial Board and blogs at: johnseiler.substack.com

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