Taxable Talk

When California's budget was passed I noted that it was full of smoke and mirrors. It was based on an optimistic scenario rather than a realistic scenario.

So far, it's only off by $3 billion; the Los Angeles Times notes that, "Capitol budget analysts say preliminary data indicate the problem will probably grow to at least $10 billion."

The crisis will be worse in California than in other states because capital gains are a high percentage of the personal income tax created. (In California, there is no preferential tax rate for capital gains.) With the stock market dropping there will likely be few capital gains to report on tax returns that are filed next year.

Governor Schwarzenegger has called a special legislative session beginning next Wednesday to deal with the crisis. Don't expect anything other than more smoke and mirrors. Democrats want a top-to-bottom review of the state's tax code (that means they want increased taxes) while Republicans want business tax cuts.

Proposition 12 would issue $900 million in bonds to provide loans to California veterans to purchase homes and farms. It would cost $59 million a year to repay the debt (for thirty years).

Supporters say that the Cal-Vet Home Loan program has been a huge success; the measure was placed on the ballot by a unanimous vote in both the State Assembly and State Senate. Opponents say that the bond measure would cost the state money and the screening in the program needs to be tightened.

That's the end of the propositions on the state ballot. Next week I'll look at Orange County Measure J and Irvine Measures R and S.

If you're a California resident you know that we have a dysfunctional legislature. One of the main reasons for this is that back in 2001 the Democrats and Republicans in the legislature drew up new districts. They made a deal, and made all but a couple of seats "safe." That's called gerrymandering, and almost every legislative district in the state is gerrymandered.

For example, my Assembly, State Senate, and Congressional seats are extremely safe Republican districts. While there's a Democratic candidate for each office, it's not going to matter--all the Republican candidates will win in a cakewalk. Similarly, almost every Democratic candidate will win easily. When the districts aren't competitive you tend to get legislators who are highly partisan and don't compromise.

Proposition 11 would change how redistricting is done in California. There would be a commission to handle redistricting for the state legislature. While this measure has almost no direct fiscal impact, eliminating the dysfunctional legislature can only be a boon to California.

Remember to vote on November 4th.

Proposition 10 would issue $5 billion in bonds. These bonds would then be used to provide $3.425 billion to aid consumers purchase high fuel economy or alternative fuel vehicles. Another $1.25 billion would be used for research and development of renewable, solar, and win energy. There would also be grants to cities.

Like any measure with bonds there is a cost. For this measure it's $335 million a year. Given the current credit market it's likely that's an understatement of the expense.

Proponents argue that Proposition 10 would help lead California to energy independence. Proposition 10 is supported by the AQMD. Opponents, including some consumer groups and the California Federation of Teachers, argue that this measure would remove money from other programs.

No matter where you stand on this remember to vote on November 4th.

Proposition 7 has done something this election cycle that I would have thought was impossible: It is opposed by almost everyone. The opponents include the Republican Party, the Democratic Party, the United Farm Workers Union, the California Chamber of Commerce, and the California Taxpayers' Association.

What would Proposition 7 do? It would require utilities to generate 20% of their power from renewable sources by 2010 (with that percentage increasing to 40% by 2020 and 50% by 2025).

Proponents argue that Proposition 7 would help solve global warming, increase renewable energy use, and wouldn't cost much to California. Opponents argue that it would cut small wind and solar companies out of the market, would dramatically increase rates for everyone, and would dramatically hurt the economy.

Remember to vote on November 4th.

Proposition 6 requires specific funding for police and law enforcement, and adds several new crimes (mainly gang-related) to the penal code. It also changes sentencing, generally tightening (lengthening) sentences, especially for gang-related offenses. It is also estimated to cost at least $500 million annually, and potentially could have a one-time cost of $1 billion.

Proponents argue that it fights gangs, and helps crime victims. Opponents argue that it spends money needlessly.

No matter how you feel make sure you vote on November 4th.

Proposition 5 is one of the few non-bond initiatives that could impact taxes on this year's California ballot. Proposition 5 changes sentencing for drug offenses, which may be good or bad depending on your views.

It definitely impacts taxes, though. The initiative allocates $460 million to expand treatment programs for drug offenders; it increases costs by over $1 billion for expanding drug treatment and rehabilitation programs. It may also save over $1 billion by decreasing prison and/or parole operating costs.

Proponents argue that it will increase treatment programs, decrease prison overcrowding, and save money. Opponents argue that it shortens parole for some violent drug offenders, would cause damage to schools, sets up two new bureaucracies, and increases social costs.

This is a very complex proposition that deserves perusal before you vote.

These three propositions do not directly impact taxes. Proposition 4 would mandate a waiting period for 48 hours before a minor could have an abortion. Proposition 8 would ban same-sex marriage. Proposition 9 adds victims rights to matters relating to parole.

None of these three initiatives directly impact taxes. They are, though, important matters that you should review (if you're a Californian). Remember to vote on November 4th.

Yet another bond proposal. This one would raise $980 million in bonds to help children's hospitals. The downside is that it would cost taxpayers $2 billion per year over $30 years to repay the bonds.

The bonds would be used at msot of the children's hospitals in the state. Proponents argue that children's hospitals could use the money to expand and help more children. Opponents argue that the state is in debt, and that hundreds of millions from an earlier version of this proposition (Proposition 61) remain unspent.

Remember to vote on November 4th.

Proposition 2 would change animal agriculture, a major industry in California. It would impact not only cattle and chickens but eggs and some other industries.

Proposition 2 would require more "humane" handling of animals. This sounds innocuous, but it's not. I worked in agriculture (citrus, not animals) for many years. Should this measure pass it would increase prices for eggs, would likely increase prices for beef, chicken, and veal, and would eliminate any expansion of those industries in California. In fact, the most likely result would be a movement of jobs from California to nearby states (and perhaps to Baja California).

Proponents of the measure state that this would be more humane to the animals, improve safety, and help family farmers. Opponents believe that this measure could negatively impact public health, would increase costs, and would decrease jobs.

It's time to begin our study of the ballot measures on California's ballot in two weeks. I will be continuing my series on the presidential candidates—my article on John McCain will be up later this week. For now, let's look at Proposition 1A, the Safe Reliable High-Speed Passenger Train Bond Act.

If this measure passes $9.95 billion of bonds would be sold by the state, costing about $19.4 billion over thirty years (or around $667 million a year). The bonds would be used to construct a high speed train from Los Angeles to San Francisco.

Proponents argue that passage would lead to a safe, high-speed train system to link the state. Opponents argue that this would be a huge cost to the state, and would run in red ink. The Legislative Analyst estimates that annual operating costs would exceed $1 billion, so that too must be figured in.

After the arguments were written the financial credit crisis occurred. That's not mentioned by either the proponents or opponents, but you need to consider it. The ability of any government to issue bonds has been reduced; it's likely that borrowing costs would be higher—potentially much higher—than estimated. I am very unconvinced about ridership claims; train service in the United States has to be supported by the government in order to continue.

No matter what you think, do make sure to vote on November 4th.

Note: Proposition 1 (listed in the original Voter's Guide) was removed from the ballot and replaced by Proposition 1A (listed in the supplemental Voter's Guide).

Surprise, surprise: California's budget, assembled with smoke, mirrors, and lots of hope is already in trouble. Analysts already see a $1 billion deficit and think that $3 billion is a more likely number...and we're still in October. The fiscal year has over eight months to go. Given the probable lowering of income tax collections next year things could get ugly in Sacramento again.

Republicans still pledge no new taxes while State Senate President Pro Tem Don Perata wants to tax goods and services that haven't been taxed in the past. Since tax increases require a 2/3 vote of the legislature (meaning that Republican votes are required) don't expect any substantial tax increases.

Given the rhetoric you should also not expect any meaningful legislation until the very last minute.

News Stories: New York Times, Forbes (AP), Los Angeles Times

And that's not good news for Sacramento.

The Tax Foundation came out today with their annual report of state tax climates. No surprise, California is the third worst climate, surpassed only by New Jersey and New York. First, here are the ten best state climates for business taxation:

1. Wyoming
2. South Dakota
3. Nevada
4. Alaska
5. Florida
6. Montana
7. Texas
8. New Hampshire
9. Oregon
10. Delaware

And now the ten worst state tax climates:

41. Minnesota
42. Nebraska
43. Vermont
44. Iowa
45. Maryland
46. Rhode Island
47. Ohio
48. California
49. New York
50. New Jersey

There is some good news for California. The Tax Foundation no longer believes that the Bronze Golden State has the worst individual income tax in the country. It's not that California has improved; rather, Maryland now has a worse system.

Maryland managed a remarkable drop—from 24th in last year’s index to 45th in this year’s—by raising its individual income tax, corporate income tax, sales tax and cigarette tax all in the same year. Maryland added four new brackets to the individual income tax, increasing the top rate by 1.5%, adding new complexity, and introducing a big marriage penalty. In fact, we now rate Maryland’s as by far the worst individual income tax in America, displacing California for that dubious distinction.

California ranks poorly in almost every category: 45th for corporate tax, 49th for individual income tax, and 43rd for sales tax. The lone bright spots are being ranked 16th for unemployment insurance and 15th for property tax.

There's bad news on the horizon for California. The recently enacted budget restricted using net operating loss carryforwards. That will lower California's score in future years. But our legislators appear to have one goal—making sure California goes to the top. Nevada, Oregon, and other nearby states aren't complaining in the least.

Governor Schwarzenegger warned that California might need a $7 billion loan because the state is currently unable to float a short-term bond. It's not that a bond issue couldn't be sold; rather, the interest rate would be quite high.

Bluntly, California will soon be forced to cut spending. The budget this year is filled with smoke and mirrors; next year's situation will be worse. Revenues have been increasing but spending has increased faster. Discipline will be enforced on the Bronze Golden State one way or another. This year's budget postponed the day of reckoning. I thought that postponement was until next summer but it might not last that long.