CA’s Tax Increase In Waiting
Yesterday the Legislative Analyst’s Office (LAO) released its Multiyear Budget Outlook through fiscal year 2026-27, forecasting $52 billion of deficits over that period:
That’s bad enough but it gets worse when LAO loses its nerve. Whereas in earlier communications LAO had discouraged legislators from dipping into reserves unless the state entered a recession, now it’s suggesting using reserves to address half of the budget problem:
LAO then recommends that the remainder of the deficits be addressed with “revenue increases, cost shifts, and other spending reductions.” As a result, taxpayers could be looking at a tax increase both to address a deficit and to replace reserves that already are just a quarter of those required in a recession.
We would take a very different path. First, the Legislature should cut spending to any recipient of state funds — i.e., state agencies, local and county governments, transit agencies, special districts, schools, colleges and universities — in an amount equal to the recipient’s spending on health care for retired employees that exceeds the average of retiree health care spending in other states. That would force those recipients finally to modernize outdated retiree health systems on which they unnecessarily spend many multiples more than other states:
That would save the state and its subsidiaries upwards of $10 billion every year without jeopardizing excellent health insurance for retired employees.This year the state alone is spending $3.1 billion on its outdated retiree health care system and incurring additional costs from implicit subsidies and retiree health debt. CSU alone is spending more than $400 million, a twelth of the funding taxpayers are providing that institution this year. UC, Community Colleges and urban K-12 school districts waste billions more, as do San Francisco, Los Angeles and other cities and counties and BART, SFMuni, LA Metro and other transit agencies. As demonstrated by other states and the City of Glendale, all of those entities could cut that spending by 80+ percent while still ensuring excellent health insurance for retirees.
After taking that step, the balance of any deficits should be addressed first by reducing prison staffing and compensation and holding the line on other employees’ compensation. Only after all those efficiencies have been gained should any programs be reviewed for cuts. The use of reserves should never be considered during a period of economic expansion and low unemployment such as California continues to experience. Instead, legislators should ask voters to approve a constitutional amendment boosting the share of tax revenues that can be deposited in reserves. In no event should a tax increase be considered to cover up wasteful or unnecessary spending. That lesson was learned in 2012, when a 30 percent tax increase was enacted to cover up a sharp rise in pension costs, another unnecessary cost that could have been avoided by proper management of employee benefits. The state must get its own house in order.
Govern For California