The Kounalakis Tax Increase

Lieutenant Governor Eleni Kounalakis and every other candidate for governor in 2026 should be paying very close attention to the Multiyear Forecast in Governor Newsom’s Proposed Budget:

Thatʼs because Mr. Newsom forecasts negative reserves by the time the next governor takes office.

The candidatesʼ first question of Mr. Newsom should be why he proposes to draw down reserves now even though the state is not in a recession. For what appears to be the official answer to that question, see page 4 of the Governor’s Budget, which without tongue in cheek claims that the state overspent in 2023-24 because officials didn’t know by the time they enacted that budget in June 2023 that tax revenues had been as adversely affected by the 2022 stock market as they turned out to be. That excuse strains credulity given that anyone and everyone who pays capital gains tax (presumably including the governor and lieutenant governor and their spouses) knew at the very beginning of 2023, much less by June, that their tax payments were going to be materially lower that year as a result of the 2022 stock market. It’s hard not to conclude that willful ignorance played a role — just in time to hand out large salary and wage increases to political patrons as part of the budget — and even if it didnʼt, whatʼs the excuse for drawing on reserves absent a recession and when the revenues Mr. Newsom forecasts for the budget year are 50 percent higher than the revenues he inherited when he took office?

The candidatesʼ next questions should be whether the $10.6 billion in “Delays,” “Deferrals,” and “Fund Shifts” proposed by Mr. Newsom as part of his budget will also burden the next governor and why the state isnʼt employing the ingenuity it’s using to boost federal financing of Medicaid to make use of billions of Medicare and Obamacare funding for retired employee health care.

If Mr. Newsom gets his proposed budget, the next governor could face a recession without reserves and be pressured to propose another tax increase. So if I were a candidate for governor, I’d encourage Mr. Newsom to submit a new budget that instead of drawing on reserves cuts back sharply on the number and cost of public employees since those categories have grown sharply under Newsom, require all public agencies, schools, colleges, universities and local governments to do the same and to adopt the Glendale cost-saving model for retiree health care, reduce pension promises to new employees and to current employees for years not yet worked, and aggressively import technology into the provision of government services so as to improve services while cutting back on the number and cost of public employees.

It’s the dirty little secret of California politics that elected officials distract voters with pablum while running the government largely for the benefit of public employees who play an outsized role in determining the political futures of those elected officials. That’s why public employee numbers keep rising while every other sector of the economy is doing more with fewer employees and boosting customer service to boot. It’s time California’s elected officials stopped treating public enterprises as patronage pavilions and started treating residents, students and taxpayers as customers to be well served.