Let’s Choose Door No. 3 on State Budget Surplus – Tax Relief

The California Legislative Analyst’s Office is projecting a $19 billion budget surplus for the 2018-19 fiscal year which begins next July 1. The media wonder if lawmakers should spend it or save it. There’s a third option, though, that is going unmentioned. Take door no. 3, please.

Only about $7.5 billion of that $19 billion will be available. Roughly $11 billion by law must be deposited in the state’s rainy day fund. But that still leaves a lot of money floating around with no firm destination. Here’s an idea: Return it to its rightful owners, the taxpayers.

Radical? Absurd? Crazy talk? Maybe to some. Maybe to a lot, given Sacramento’s long habit of freely spending other people’s money.

“Anyone who believes that California politicians won’t find a way to spend the surplus also believes that you can leave an alcoholic alone in a room with a bottle of whiskey,” says Jon Coupal, president of the Howard Jarvis Taxpayers Association. “Finding a way to return the money to taxpayers would be ideal, but is as possible in California as finding Bigfoot walking down the 405 freeway.”

Nevertheless, it is the right thing to do. Taxpayers were overcharged — they’re overcharged in this state even when there is no surplus — and the government owes them a rebate.

One might even argue that the state is legally obligated, under the 1979 Gann limit that was intended to impose state spending restrictions, to send out rebates. Gov. George Deukmejian did just that in 1987. Unfortunately, the LAO says its estimates “assume neither rebates nor tax reductions occur — in part because it is difficult in advance to predict how the formulas associated with these budget rules will play out.”

However, the Sacramento Bee reported earlier this year that the budget Gov. Jerry Brown 2017-18 proposed in January “wrongly excludes $22 billion from total spending subject to the limit.” In a separate report, the LAO said that the way that budget was structured would make it “highly vulnerable to legal challenges.” So let’s see how the 2018-19 budget plays out.

Though not common, tax rebates aren’t unheard of. The federal government last issued rebates in 2008. Individual filers received $300 each, joint filers $600. They were also sent $300 for each child under 17, though a limit was placed on the maximum dollar amount that could be received.

The rebates were intended to stimulate the economy. There’s no doubt they increased consumer spending. But consumer spending and economic growth are not the same thing. While the rebates might have boosted growth — there’s no settled economic science on this — some economists argued that their impact was merely temporary, and they’re not an efficient means of expanding the economy anyway when compared to tax cuts, which raise productivity and investment.

Even if tax rebates aren’t the ideal vehicle for economic growth, the state should give the money back. Should it turn out that it’s not legally obligated to return the money, it is morally bound to do so.

This isn’t to say that tax cuts shouldn’t be pursued. They should. Zealously. But politically, rebates, as unlikely as they are, are more viable than needed tax cuts.

Finally, let’s introduce yet another destination for the surplus. Coupal says “an acceptable second choice,” which, admittedly would also be a “more realistic” option, “would be to use the funds for debt reduction, especially paying down California’s massive pension liability.” That would be door no. 4. Less desirable than no. 3, but better than the first two.

Kerry Jackson is a fellow with the Center for California Reform at the Pacific Research Institute.

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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