Is the Economic Climate in California beyond rebound?

The State Budget is a disaster but in many ways we are lucky that no agreement has been reached. Democrats and The Governator are talking new and higher taxes; Republicans in Sacramento have just enough votes to hold out for any deal that does not include higher taxes -at least until someone is bought off and caves in. So exactly what kind of trouble are we in here?

Our current state tax code places us here:

INCOME TAX #1 in the nation

GAS TAX #1 in the nation
SALES TAX #1 in the nation
BUSINESS TAX #1 in the West

The income tax may be the most interesting; the top rate of 9.3% (highest in the nation) is reached by those with incomes of just $44,815.00. The Plastico readers know that such an income might allow you to live with 5-6 other illegal immigrants in a El Monte apartment but that is about it.

The Governor has floated the idea of a "temporary- 3 year" 1% increase to the sales tax but our sales tax is already the highest in the nation - maybe that Oregon border (no sales tax) is starting to look a little closer. So where is the tipping point; where is the point of no return for the dying Golden Goose? The following article from John Matsusaka is a good read:

Where does all that state money go?

California is spending 40% more than four years ago, but on what, exactly?

By John G. Matsusaka
August 17, 2008

California state government spent $145 billion last fiscal year, $41 billion more than four years ago when Gov. Gray Davis got recalled by voters. With all that new spending -- a whopping 40% increase -- we ought to be in a golden age of government with abundant public services for all.

So why does it seem like the quality and quantity of government is not all that different from 2004? How many of us feel like we are getting 40% more public services, 40% better schools, roads, parks and so on?

The Legislature and governor, grappling with another huge budget deficit, are suggesting raising taxes, so it seems opportune to ask what we got from the last $41 billion.

Some of it went to cover increases in the cost of living, and state spending naturally grows with the size of the population. But even adjusting for inflation and population growth, state spending is up almost 20% compared with four years ago, a big enough bump that ordinary Californians should be able to notice it. The state's financial statements describe where the money went -- the big gainers were education ($13 billion), transportation ($10 billion) and health ($10 billion) -- but not why these billions don't create even a blip on our day-to-day radar.

One possibility is that we simply do not notice all of the valuable services we receive. A national 2007 survey by William G. Howell at the University of Chicago and Martin R. West at Brown University found that respondents underestimated spending in their school district by 60%; on average, they believed spending was $4,231 per student when in fact it was $10,377. They also found that Americans underestimated teacher salaries by 30%. How many Californians know that public school teachers in the state earn an average of $59,000 a year, essentially tied with Connecticut for the highest average pay in the country? Likewise, perhaps we don't notice the repaired roads or new buses and trains that take us to work.

On the other hand, maybe these billions of dollars just do not translate into services that are valuable to us.

Is paying the highest teacher salaries in the country delivering a better education for our children? Are roads and transit being built near where we live? Do big raises for prison guards promote rehabilitation and lead to more humane prisons? If funds are being directed to satisfy powerful special interests -- teachers, builders, prison guards -- rather than everyday people, the spending might not result in tangibly improved services for the typical Californian.

The reason this matters right now is that the state is at a budget juncture. Almost by accident, without any significant changes to the tax code, state revenue grew more than 30% over the last four years, so the Legislature and governor were able to fuel the state's spending growth without burdening the taxpayers.

But those days of revenue windfalls appear to be over. To bring the budget into balance, the state now has to reduce the rate of spending growth or raise taxes.

The governor has floated the idea of higher sales taxes, and the Legislature wants to increase the income tax on high-earners -- but the state already seems to be pushing the boundary on taxes.

California's statewide sales tax of 7.25% is already the highest in the nation. Income taxes are also high, with the 10.3% rate on the top income bracket the highest in the nation. The highly progressive nature of the state's income tax schedule -- the top 10% of earners supply more than 70% of income tax revenue, according to one estimate -- already results in excessive revenue volatility. It also raises questions about how much redistribution of wealth is fair: Should the top 10% foot the bill for basic services enjoyed by all Californians?

Legislators, pundits and interest groups warn of dire consequences if state spending is slowed or cut. But if most Californians haven't detected a significant change from the last $41 billion, including 40% more on schools, will they notice if some of that spending disappears?

Voters are criticized for wanting more services yet being unwilling to pay higher taxes. That is unfair; Californians have repeatedly demonstrated their willingness to fund valuable programs. But if spending can go up 40% and most of us can't discern any difference, can we blame voters for being hesitant to put even more tax money in the hands of the state?

John G. Matsusaka is a professor of business and law at USC and the author of "For the Many or the Few: The Initiative, Public Policy, and American Democracy."

Metro Sales-Tax Shell Game (LA Weekly)

A $40 billion promise fuels suspicion of an agency that has lied large before

By Max Taves, LA Weekly

Wednesday, August 13, 2008 - 5:59 pm

THE STATED MISSION of the L.A. Bus Riders Union is to promote the “needs of low-income people” and make sure that oppressed people “be given priority since they suffer systematic racial and national oppression in our society.”

It’s not every day that the lefty bus advocates find themselves on the same side of the political fence as leaders of the Sherman Oaks Homeowners Association — where a political unknown named Howard Jarvis first shopped his California tax revolt.

But that’s exactly what has happened.

With emerging numbers now showing that the Westside will get far more transit investment per capita, heavily subsidized by pissed-off taxpayers in the San Fernando Valley, and with the Bus Riders Union furious over the heavy emphasis on rail at the expense of bus lines, a proposed half-cent local sales-tax hike is creating really strange new bedfellows — united by their suspicion of Metro.

If the sales tax is approved this month for placement on the November ballot by the state Legislature and Arnold Schwarzenegger — and that question is up in the air as chaos unfolds over the budget in Sacramento — and if voters approve it this fall, the new sales tax would raise $40 billion over 30 years.

Most of the grandest projects would serve the Westside and South Los Angeles: $1 billion to build the Expo light-rail line from downtown to Santa Monica; $235 million for the vaguely defined Crenshaw Transit Corridor; nearly $1 billion to partially build a Subway to the Sea.

But, in fact, all dollar figures are strictly preliminary. If Metro’s history is any guide, costs will skyrocket almost from the moment the money flows, and Metro will eliminate many improvements that its leaders, including Mayor Antonio Villaraigosa and Los Angeles County Supervisor Zev Yaroslavsky, are now promising to voters.

“There’s a specific mention of how much money is going to go toward the Subway to the Sea and how much is going to go toward an LAX extension” of the Green Line, says Manuel Criollo of the Bus Riders Union. “There’s no concrete numbers [for buses]. We don’t know how many buses they’re going to buy. The reason they wrote it in such a vague manner is so that they can change it.”

The Valley’s history of getting shortchanged is also coloring its leaders’ suspicions — again. Until this spring, Ron Kaye was editor of the Valley-based Daily News, who often focused his editorials on a downtown-centric City Hall that chronically drains the outlying areas to spend the money elsewhere.

The last time Valley residents backed a similar sales-tax increase, in fact, City Hall politicians promised sweeping transit fixes for the Valley. Instead, Kaye says, “At the Daily News, there was a tabulation that the Valley had paid $2 billion to $3 billion [toward local transit projects] and had gotten a $300 million busway” for its troubles. That busway, the Orange Line, is already groaning at full capacity.

This time around, the Metro has made it virtually impossible to calculate whether the Valley’s money will again be diverted elsewhere. The regional transit authority tracks total spending by seven big areas, lumping all of Los Angeles — including the Valley — into “City of Los Angeles.”

Many Valley community leaders suspect that it’s déjà vu all over again. “They promise the Valley great transit lines, and then they build them in other areas,” says Richard Close, president of the Sherman Oaks Homeowners Association and a former leader of the Valley secession movement. “Unless you have a Valley government, we get nothing. We get crumbs. This is just another indication of it.”

No, it’s not, says Richard Katz. The Villaraigosa appointee on the Metro board and a former state legislator, Katz points to expensive proposed projects that benefit the Valley and disgruntled peripheries: $100 million for Rapidways in the Valley; $735 million to extend the Gold Line to Claremont; and millions for an extremely unformed plan to "improve" the 405 in the Sepulveda Pass.

“The voters understand that if you live in Palmdale and you fix the 405, it will benefit you,” Katz says. “I think people get the need for a regional system.”

According to Metro (formerly MTA), 73 percent of November voters favor the tax after being fed selective information. But the poll was taken while gas prices were rapidly spiking, which is no longer the case.

The tax measure’s language offers voters vague pleasantries. It’s called “Traffic Relief. Rail Extensions. Reduce Foreign Oil Dependence.” It promises to “repair potholes,” “synchronize traffic signals” and keep fares low for students, the elderly and the disabled.

“Ironically, this is more honest than measures in the past,” Close says. “It doesn’t even promise us that much. But honesty will ultimately lead to a strong ‘no’ vote.”