More Election Woes: Tax Hikes to Save Pensions

In some excellent reporting by Chris Reed of CalWatchdog, Reed found that more than 100 local governments in California asked voters for tax hikes on Election Day, double the 56 the Bond Buyer said it recorded in November 2016. These 100+ measures were on top of the 36 city and county tax measures that were up for vote in the June primary.

Reed wrote that CalPERS’ bills to local governments are on track to double from 2015 to 2025 and need more cash from taxpayers to foot the bill.

Knowing that voters would be cool to the idea of raising taxes to fund the pensions of government workers that are likely more generous than their own, many local elected leaders depicted the additional taxes as necessary to pay for public safety and other services

Take Pasadena, the location of PRI’s Southern California office.  The Pasadena City Council placed Measure I, a proposed 0.75 cent sales-tax increase, on the November ballot as a general revenue measure.  The claim was that the funds will be used to repair sidewalks, rebuild firehouses, etc.  Voter bought the claim on Tuesday, approving Measure I with a roughly 67 percent yes vote.

But Paul Little, CEO of the Pasadena Chamber of Commerce pointed out in the Pasadena News Star the irony that “…the amount of money that will accumulate under Measure I almost perfectly corresponds with the city’s unfunded pension liabilities that have accumulated over the years as public employee contracts have included higher pay and fatter benefits.”

As Little reminds residents, the hardest hit in the city will be the least able to pay. “Sales taxes are among the most regressive taxes imposed, meaning these levies impact lower income residents much more than higher income people. So, in a city that proclaims its desire to create more affordable housing for low-income residents, the sales-tax increase will make it more difficult for those struggling to pay the rent and put groceries on the table.”

In 2016, PRI senior fellow Wayne Winegarden warned of the impending pension crisis for state and local governments.  In “California’s Pension Crowd-Out”, Winegarden wrote that covering the debt burden exclusively through tax increases would require the largest tax increase in history – an annual 28.3 billion over the next 30 years.

His most recent work on California’s pension crisis published last month notes that using a more realistic estimate of state and local public pension debt finds the problem could consume a whopping 23 percent of total state and local tax revenue to pay down the estimated $1 trillion debt.

Moreover, the necessary increase in the state and local tax burden to fully fund the state’s current pension system will cause California’s economy to be 21 percent smaller over the next 30 years compared to its current economic growth path.

And if the state chooses not to raise taxes, it would need to cut total state and local tax spending by more than 8 percent across the board. Such an expenditure, among many others, would mean a $5.4 billion cut in the school budget, $4.9 billion in income support programs, and a $2.9 billion in higher education.

Historically, local hikes in sales and hotel taxes are approved about 60 percent of the time in California, wrote Reed. In Pasadena’s case, Measure I passed/failed.  But until California’s state and local governments make fundamental reforms, such as repealing the California Rule or moving to a 401k-style pension plan, Pasadena residents, as well as Californians all over the state, can expect more tax hikes by hook and by crook.

Rowena Itchon is senior vice president 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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