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Thursday, November 22, 2007

California Budget Woes + Possible Solutions

California continues to have budget deficiencies. The Legislative Analyst's Office (LAO) projects a $1.9 billion deficit for the current year if no actions are taken to bring the budget into balance. And, it gets worse. The LAO projects a shortfall of $8 billion for 08/09 and another $8 billion for 09/10. Thereafter, with debt to fund prior deficits paid off, the annual shortfall is projected to be a mere $3 billion per year.


Here are some ideas to address the shortfall:

  1. Get serious about collecting much of the $1 billion of use tax that goes uncollected annually. (more info)
  2. Bring our sales tax into the 21st century by including today's consumption - digital items and services, and eliminating some exemptions. There are billions of dollars here. For example, we could bring in about $1 billion of revenues just from imposing the sales tax on admissions, amusements and personal storage. Of course, ANY expansion of the sales tax should be accompanied by a rate reduction. But, there is still revenue to be obtained here very legitimately. After all, there is no reason for taxing a lawn mower, but not what a household consumes in the form of gardening services. Also, digital goods and services tend to be a type of consumption of higher income folks and not taxing these items, but instead taxing clothes and CDs, is not fair. The sales tax should be better distributed among rich and poor. (more info)
  3. There is more than one way for the government to spend money. The most obvious way is for the government to write someone a check. The less obvious way is for the tax law to allow a special deduction, income exclusion or tax credit for some activity. For example, if your employer provides health insurance for employees, the employer takes an income tax deduction for the cost, but the employee does not need to include the benefit in income. That is equivalent to the government writing a check to these employees. This spending is hidden though and does not need to be evaluated annually in the budget process. So, governments must decide each year how much to spend on higher education, for example, while employees continue to get unchecked government assistance for health insurance. And this is just one example, another costly one is the home mortgage interest deduction. The health insurance tax break costs California about $4 billion annually and the home mortgage interest deduction costs about $4.5 billion annually. And, that home mortgage deduction is for 2 homes and up to $1.1 million of debt. Why should the state be subsidizing so much? These and other tax breaks should be reviewed for appropriateness and logic and a goal of generating at least $3 billion from changes. (The list of tax breaks (hidden government spending) - referred to as "tax expenditures" can be found here.)
  4. Let's bring back the higher vehicle license fee, or at least for high value cars. When the VLF was cut a few years ago, the average savings for a car owner was $138 annually. That's not much per car owner, but adds up to a lot for the state. Legislators should aim to generate at least $2 billion from a higher VLF.
  5. If we really want to reduce carbon emissions, as we must by law, let's get serious about it and institute a carbon tax. It should be added to the carbon content of fossil fuels (oil, coal and natural gas) and in a transparent way so users see the tax and can be motivated to reduce their use of fossil fuels. The tax could be used to generate at least $2 billion annually with $1 billion returned to taxpayers for alternative energy incentives.
  6. Hire auditors to examine where spending can be reduced, purchasing efficiencies created, and technology used to reduce costs.

What are your ideas to balance California's budget?

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