The Taxes That Didn't Bark

Was it a good thing for California that legislative Republicans stymied Gov. Jerry Brown on taxes in 2011? Robert Kleinhenz, the chief economist for the Los Angeles County Economic Development Corp., thinks so. According to the Los Angeles Times, Kleinhenz told the Sacramento Press Club that, “We were still reeling from the recession. [A tax increase] could have taken an already dire situation and made it worse.”

If Kleinhenz offered any evidence or argument to back up his opinion, the Times didn’t say. In fact, the Times didn’t even bother, for the benefit of readers, to clear up Kleinhenz’s apparent case of amnesia. The issue facing California when Jerry Brown became governor in January 2011 wasn’t whether to raise taxes. Higher taxes had already been in place in California for nearly two years: the temporary tax increases approved by the Legislature and Gov. Arnold Schwarzenegger in February 2009, at the very depth of the Great Recession. In his first budget Brown sought only to maintain the status quo by extending the level of taxes already in place.

We don’t have to speculate, then, about whether higher taxes “could have taken an already dire situation and made it worse.” California took the leap in 2009. If higher taxes were destructive, Kleinhenz might be expected to offer evidence of it in the economic performance of the state while they were in effect. That’s the kind of thing a skeptical journalist (as opposed to a stenographer) might want to check, either by looking directly at the data or interviewing an expert. The Times failed to do so.

So let’s try it here:

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Job Growth, California and nation

The graph compares the year-over-year percentage change in private nonfarm employment in California (blue line) against the nation as a whole (red line) for 2010 through 2012. California’s rate of recovery almost exactly tracks the national economy both on the left half of the graph, the period when the temporary taxes were in place, and on the right half, after they disappeared in July 2011. Raising taxes “in an already dire situation” apparently didn’t makes things worse, nor did lowering them two years into the recovery make things better. 

This is not surprising. Readers would understand this if the Times and other media would occasionally provide some numbers to give context to our political arguments. One of the great failings of public policy reporting is that journalists so rarely show readers what they mean by phrases like “higher taxes.” Brown’s initial budget proposal to extend the temporary taxes would have raised revenues by a combined $15.5 billion over the 2010-11 and 2011-12 fiscal years. What does $15.5 billion mean? Well, total personal income in the state for those two years was $3.4 trillion. The argument was about less than one-half of 1 percent of personal income. 

And the alternative to that small drag on the economy, Kleinhenz and the Times neglect to tell us, was not to avoid all drag. Unable to extend the Schwarzenegger temporary taxes, Brown and the Legislature were forced cut spending. Firing teachers and state workers created its own small drag. Some of the private-sector job gain of 632,000 in the graph above was offset by the loss of 83,000 public sector jobs. 

So was it a good thing that Jerry Brown didn’t get his way on taxes in 2011? Measured by the short-term movement of the economy, it didn’t matter much one way or the other to most Californians. But to all those young Californians who found themselves shut out of college or trying to learn math and science and English in schools with shortened years and overcrowded classrooms, it may matter a lot for the rest of their lives.

'Orwellian,' Jerry? Look in the Mirror

Jerry Brown has hit the Prop 30 campaign trail this week, in full whine. With poll numbers like this and this, his bad mood is easy to understand. But is his whining justified?

The governor calls the opponents “Orwellian” for their recent TV ad saying that Prop 30 will raise the tax on gasoline. But the fact of the matter is that the issue is cloudy.

Prop 30’s opponents make a plausible legal argument that the provisions of Brown’s measure, written to be a constitutional amendment, will yield a higher tax on gasoline and diesel because of the way they interact with the contortions the Legislature has gone through in recent years on swapping sales taxes on fuels for fuel excise taxes. The Legislative Analyst disagrees, but that office brings no legal expertise to the table on the issue. This would not be the first time an initiative created unintended effects because of poor drafting. Given the complex tangle of fiscal knots with which California has bound itself in its laws and constitution, differing interpretations of how the law works are inevitable, and hardly the stuff of Orwell’s 1984 or Animal Farm.

When Brown invoked Orwell, perhaps he was thinking about his own ads for Prop 30. In this television spot, state Controller John Chiang looks into the camera and says, with a straight face, that Prop 30 “means no more school cuts, with strict accountability. Sacramento politicians can’t touch the money….”

None of that is true, of course. Prop 30 temporarily raises taxes and state revenue, thereby reducing the state’s deficit and avoiding the trigger cuts to schools Brown and legislative Democrats enacted to threaten voters. But it doesn’t guarantee that schools won’t be cut more in the future, either when the next recession arrives (as it surely will) or when the tax increase expires, some of it in four years and the rest in seven.

Nor does it put the money off limits to “Sacramento politicians.” The extra revenue created by Prop 30 will free up an equal amount of money that can be budgeted for any purpose. That budgetary flexibility is the great advantage Prop 30 holds over Molly Munger’s Prop 38, which is mostly earmarked only for schools and pre-school. It’s why Brown’s measure has attracted support from health advocates, hospitals, social services providers, prison guards, universities, and the like. The extra revenue protects programs they care about, and that many voters care about too. (Has anybody bothered to tell all those aging baby boomers opposing Prop 30 that they are voting against funding the Medi-Cal program that will pay for their nursing homes?) Giving the people we elect more authority and discretion in raising and spending money is essential to making California governable.

But Brown and his hired liars are afraid to say so. Instead, the Prop 30 campaign puts out ads in which a Sacramento politician tells us untruths about what Sacramento politicians can or can’t do with the money the measure raises. It’s easy to understand why they do that. But understanding why someone might say “War is peace. Freedom is slavery. Ignorance is strength” doesn’t stop it from being Orwellian.

The Budget That Wasn't Phony Enough

Some readers seem to have concluded that my critique of Controller John Chiang’s power grab means I favor a gimmicky budget. Those readers haven’t been reading very closely. So let me spell it out again.

Yes, as I’ve written, the budget passed June 15 is full of gimmicks. That’s a bad thing. It’s also an inevitable thing, given the constitutional whips and chains that prevent a legislative majority from taking the actions, like raising taxes, suspending the Prop 98 school funding guarantee, and moving spending and revenue from programs imposed by initiatives, needed to balance the budget. In California, what is constitutionally required (that the Legislature pass a balanced budget) is not constitutionally permitted.

But as I’ve also written, there is a constitutionally approved and timed-honored way of bringing a gimmicky legislative budget into balance: The governor uses his line-item veto to reduce the appropriations in the budget to a level that can be funded with anticipated revenues. Jerry Brown, to no one’s surprise, did not have the political courage to do that. Far from favoring a gimmicky budget, I’ve been pretty much alone in arguing that Brown failed to do what is necessary to have a balanced one.

Those readers seem also to believe that Chiang is standing against budget gimmicks. Again, they have failed to read very closely.

In moving illegally to withhold legislators’ pay, Chiang explicitly denied he was acting against the gimmicks in the budget. “While the vetoed budget contains solutions of questionable achievability and some to which I am personally opposed, current law provides no authority for my office to second-guess them,” he said. He instead relied on an invented authority to check the budget’s internal arithmetic.

Let’s be clear what that means: Chiang would not have taken away lawmakers' pay had they set the revenue estimate high enough to cover his re-estimate of the budget’s spending. In other words, Chiang has punished the Legislature because the budget wasn’t phony enough.

Thanks to Chiang, you can be sure lawmakers will never make that mistake again.

Jerry Brown's sad little speech

Even measured against the diminished expectations Gov. Jerry Brown has set, his 2011 State of the State message was a sad little speech.

Short on ideas, stripped of inspiration, and studded with clichés (“not a time for politics as usual”; “we owe it to ourselves and to our forebears—and to our children--to rise to this occasion”) the speech shoved everything else aside to dwell on what Brown called “Job Number 1,” the budget. By the time the speech limped to its conclusion, it had turned into Job All.

Brown’s explanation for his narrow focus? California is in fiscal crisis, “real and unprecedented.” But as Brown is old enough to know, the budget crunch is nothing new. It’s chronic. Ask Gray Davis and Arnold Schwarzenegger, who dealt with deficits of the same magnitude.

Better yet, look at Pete Wilson in 1991, who arrived to find a deficit of the same size, in percentage terms, as Brown inherited. In his first State of the State address Wilson acknowledged that California was in “heavy seas” and would have to cut the budget accordingly. He then went on to outline a program of “preventive” government to “give increasing attention and resources to the conditions that shape children’s lives.” Measured against Brown’s performance, Wilson today reads like Demosthenes and FDR rolled into one.

The saddest thing about Brown’s speech, though, was his attempt to turn his budget tactics into a matter of principle.

“Under our form of government, it would be unconscionable to tell the electors of this state that they have no right to decide whether it is better to extend current tax statutes another five years or chop another $12 billion out of schools, public safety, our universities and our system of caring for the most vulnerable,” he said in support of his call to put a tax extension measure to the voters this spring.

Even under California’s crazy system of government, there is no such right, of course. “The voters deserve to be heard,” he said. Didn’t they speak last November? Didn’t they elect Brown himself and put Democrats in control of the Legislature with an extra seat? In a representative democracy, aren’t such elections meant to establish the popular will?

The answers are yes*, yes*, and yes*. The asterisk means: not in California. Our state has a second form of government—its extensive system of supermajority vote rules and voter mandates on fiscal matters—that overrides the normal operation of democracy.

Everyone in Sacramento understands that the budget can be balanced only through a combination of spending cuts and tax increases. Voters know that. No one in the Legislature, including the Republican legislators who oppose the tax extension, is willing to vote for an all-cuts budget. But the current system of supermajority approval for taxes stands in the way of acting on what the voters decided in November. Republicans can block taxes without ever having to vote for the cuts that would inevitably result. It lets them be both irresponsible and unaccountable with little or no political risk.

The only reason to call a special election is to get around this broken system. For Brown, going to the voters is a matter of expedience, not principle. If he had truly wanted to be honest, and to help voters understand why California is in this mess, he would have said so.

Instead, California witnessed the spectacle of its newly elected governor, winner by 13 percentage points, begging the party that just got wiped out in November to let him hold a special election to ask voters to do the job that Brown and the Legislature just got elected to perform. That’s how California works now: First it makes men governor, then it makes them crawl.

It really is budget Doomsday in California

Let’s take as a given that the chances of passing a reasonable California state budget—one that puts the state on a path to long-term solvency while protecting the most essential public services—range from improbable to zero. Still, even against those long odds, wouldn’t it help things along if Dan Walters could be bothered to give his readers more facts and less snark? 

In his Dec. 15, 2010 column, “Brown’s doomsday strategy very risky,” Walters chides California’s old-new governor Jerry Brown for suggesting that the huge gap between expected revenues and baseline spending will force unpleasant cuts in schools. That gap amounts to more than $20 billion in the coming year, equivalent to nearly one-quarter of the annual general fund budget. Walters implies that Brown is pursuing the state equivalent of a “Washington Monument strategy.” That’s when bureaucrats defend their budgets by arguing that any cut will to force them to wipe out their most publicly visible activity. 

“No politician ever threatens to cut welfare grants, health services for the poor or other programs that don’t affect middle-class voters,” Walters writes; “instead, voters are told that their personal safety and/or their children’s futures would be at risk.” 

The only trouble is, all of this is either untrue or misleading. 

It doesn’t take much of a memory, or more than a couple of seconds on a search engine, to recall that some guy named Arnold Schwarzenegger threatened to not only cut welfare grants, but also eliminate them altogether. 

“California no longer has low-hanging fruits,” Schwarzenegger said way back in May. “As a matter of fact, we don’t have any medium-hanging fruits. We also don’t have any high-hanging fruits. We literally have to take the ladder away from the tree and shake the whole tree.” How soon we—or at least some of us—forget. 

What’s true for welfare grants applies to health services for the poor. Politicians like Schwarzenegger have not only threatened to cut them; they’ve actually carried out the threats, reducing benefits in recent budgets. 

But it’s also misleading in the extreme to imply that cuts to health services don’t affect middle-class voters. About two-thirds of Medi-Cal dollars go to care for the elderly and disabled. Without Medi-Cal, the cost of their care would otherwise fall on their middle-class families. And every one of those Medi-Cal dollars is income to someone in the health industry—a doctor, nurse, lab tech, hospital administrator, nursing home operator. Those jobs account for around one-sixth of the state’s output. They also form the backbone of the middle class. California voters, who routinely tell pollsters that they want to protect health services, seem to understand this better than Walters. 

And finally, there’s Walters’ false implication that telling voters that schools are at risk is only some political game or gambit. 

As the Legislative Analyst recently reported, even if the state had enough revenue in the upcoming year to fully fund schools at the Prop 98 minimum guarantee, “the minimum guarantee would fall $5.2 billion short of fully funding baseline K-14 costs in 2011-12.” In other words, California is looking next year at a roughly 10 percent reduction in school funding, on the natural. This is on top of the recent cuts that have forced teacher layoffs, shorter school years, and bigger classes. And it’s before anyone in the state Capitol asks schools to share in the pain of closing the budget deficit. 

So say what you will about Jerry Brown, he’s not pulling anybody’s leg here. If this is not yet budget Doomsday in California, Doomsday is within sight. 

Is it politically risky to deliver that news? Probably. But somebody has to. We’re apparently not going to get the news from Dan Walters.