California’s Spending Binge Breaks Budget

California’s budget deficit has ballooned to more than $15 billion. Recently Democratic lawmakers proposed to close the gap by – you guessed it – hiking taxes on the wealthy. Yet a quick review of the facts suggests that spending cuts are a much more sensible solution.

On the tax side, the sad fact is that the Democratic proposal would further wound, if not kill, the goose laying golden eggs. Their plan calls for two new tax brackets, a 10 percent rate kicking in for couples making $321,000 and then an 11 percent bracket for those making $642,000. Moreover, the Democratic plan would raise the corporate tax rate from 8.84 percent to 9.3 percent.

These changes would give California the dubious distinction of the highest personal income tax rates in the nation, and the sixth-highest corporate rate. This is not baseless fear mongering; the historical record shows that American professionals and corporations, on net, migrate out of the Golden State when it raises tax rates even slightly.

Regardless of the effect on the tax base, we must also observe that this particular screw doesn’t have much more room to turn. According to the Franchise Tax Board’s latest figures, in California those with adjusted gross incomes of $300,000 or more represent fewer than two percent of the total returns filed, yet they pay almost 55 percent of income tax revenues. At some point, further tax hikes literally will not be an option.

Nobody wants his or her favorite program cut, and so any suggestion to reduce spending draws shrieks of protest. This gives citizens the impression that the state has been on an austerity budget. But some historical perspective will show that this is ludicrous.

Ten years ago was hardly a time of Dickensian poverty, when total General Fund and Special funds revenues were $74 billion. Five years later in FY 2003-04 – the last budget for which the allegedly “spendthrift” Gray Davis was responsible – revenues had grown to $96 billion. Now in FY 2008-09, revenues are projected at $129 billion. This means that in the last decade, the state’s revenues have risen almost 74 percent, and have grown at an average rate of almost six percent per year since Republican Gov. Arnold Schwarzenegger assumed power.

Skeptics might point out that inflation and population growth distort such figures. Yet even after correcting for these factors, the state is still taking in more tax dollars than ever before, and the efforts to paint Gov. Schwarzenegger as heartless are shown to be absurd: real, per-capita revenues have grown one percent annually during his tenure.

The politicians in Sacramento are already skimming a record amount from the paychecks of California’s workers. The reason the state is in a budget crisis is that its spending has exploded even faster than its revenue growth. The “solution” of ratcheting up taxes will only make the state more inhospitable to new businesses and their associated jobs.

Critics have excoriated Gov. Schwarzenegger’s dramatic warnings and his threats to pay state workers the minimum wage until the budget crisis is resolved. Although he ultimately has only himself to blame for the current mess, Schwarzenegger is right about the need for serious budget reform, which necessarily requires large spending cuts. Tax hikes and financing shell-games will only ensure that the next crisis is even more severe.

Robert P. Murphy is a fellow at the Pacific Research Institute. Contact him at [email protected].

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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