Friday, January 11, 2008

California - Under Taxed or Over Spent?

California hit the budget wall a long time ago, but it has taken a long time for the sound of the crash to penetrate the isolation wards of state government. As the California budget hemorrhaged tanks of red ink, state politicians labored long and hard to devise new, incredibly expensive plans to spend money that was already earmarked to go towards previous over commitments.

The problem was not that Californians weren’t being taxed enough. In fact, much of the recent rosy budget picture was due to a relatively low rate of taxation applied to an enormous base of rapidly increasing economic activity, spurred on by low taxes.

Unfortunately, parading a healthy budget in front of politicians is like running through a pack of wolves wearing pork chop underwear.

To the politicians of California, when they looked upon the vast waves of tax revenues splashing over Sacramento, what they saw was the answers to each of their pleading constituent’s wants, and the means of buying their vote and eternal gratitude – at least until they come with their next whining need.

So the California legislature spent and spent – and the governor, a Republican in name only (RINO), signed and signed those spending bills.

Republican legislators, on the other hand, used their meager power to obstruct the passage of spending bills. When they were successful, instead of earning praise for their fiscal responsibility, they were roundly condemned for being tight fisted and mean spirited. In the Age of Oprah, that’s about the nastiest thing you can call a politician. The only way you can win the hearts of Oprah’s Acolytes is to cry while you pass a bill to succor the teller of every sad tale.

The loudest teller of sad tales is the education empire. It consumes forty percent of the state budget, is very powerful politically because of their sheer numbers and the way they allocate union dues to political campaigns, and supports an ever growing administrative overhead that sucks resources from the classrooms. Wherever in California public schools are faced with challenges – children from low-income families, high percentages of non-English speaking students, uninvolved parents – those schools almost always fail the challenges.

However, that doesn’t stop the heavily unionized public school system from opposing reforms and resisting measurement of their results.

Of course, every state spending program has its supporters and promoters, and each is adamant that, rather than cutting spending, the funding for their program should be increased. Each is fully prepared to demonstrate how spending more for their program will produce future benefits far in excess of additional expenses.

Unfortunately, much is promised, little is produced.

This morning I paid particular attention to the comments by San Francisco Chronicle readers concerning Governor Schwarzenegger’s proposals. Distilled to their essence, they were: we don’t need cuts, we need increases; we don’t need less state services, we need more; wealthy taxpayers and businesses should pay more taxes; and that everyone, except those that actually need the services, should pay more taxes.

Or “don’t tax you, don’t tax me, tax the fellow behind the tree.”

As usual, the Chronicle readers drew on vast stores of ignorance to take their positions. Their first assumption is that, in a global economy, the wealthy and businesses will act like the world outside California doesn’t exist, and will continue to participate in having their wealth confiscated and redistributed to the “more deserving.”

The second ignorance based assumption is that businesses pay taxes, instead of just serving as a distribution point to pass them through to ultimate consumers in their cost of goods sold or services provided. The only times businesses are concerned about taxes are when competitive or economic pressures prevent passing them fully on to consumers.

For a San Francisco example, their increased mandatory contributions to health care costs will force restaurants to increase their menu prices, and they will make fewer sales. If no employees are cut, total expenses will increase. The higher prices may result in more or less revenue, depending on how far sales drop as prices go up. As employees are cut and profits shrink, fewer taxes will be paid into a system based on the assumption that tax revenues will be increasing substantially to meet the higher benefit levels, both for employees and the homeless and unemployed.

In a competitive economic environment, increased business taxes create a competitive disadvantage for businesses being taxed, since they can’t pass on the increases without raising prices.

Of course, business tax increases always hurt consumers, the ones cheering for taxes to soak big business, since they are the ones who actually pay the taxes when they buy the product.

Whenever I hear someone calling for more taxes on businesses because “they aren’t paying their fair share,” I mentally picture them with an “Ignoramus” sticker on their foreheads.

Right next to their “Democrat” badge.

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