A Tax Cut Plan Marred by Shortsightedness

California is now enjoying solid economic growth that is producing a bountiful yield in revenues for state coffers. So Gov. Pete Wilson plans to boost spending on K-12 education by $1.7 billion. That’s the good news in the governor’s May revisions of his proposed budget for fiscal year 1996-97. The bad news is that he is still insisting on across-the-board tax cuts and relying on $1.25 billion from Washington, money that probably will never arrive. He also is pushing for some mean-spirited cuts in grants for the elderly and disabled.

So now the annual budget fight begins in Sacramento. The tax cuts are especially problematic because they would have a detrimental effect on future state funding for schools. That is the fiscal shortsightedness in Wilson’s political call for a 15% cut in personal, corporate and banking taxes over three years, commencing as early as next January.

The governor is required by the state’s school funding formula to increase spending on education when state revenues rise. With $2.6 billion more in revenues than expected when he first proposed a state budget in January, Wilson could provide $1.7 billion more to education. The funds would include proposed cash grants of $50,000 to each of the 7,700 school sites in California and money for reducing class sizes, reading improvement programs, new books, special projects and maintenance.

The additional funds would boost state expenditure on each public school student to $4,714, up $405 from last year’s level, bringing it close to the national average, which really ought to be a minimum standard in California. Our schools undoubtedly can use the money now.

Wilson’s budget, however, would reduce future school funding--$6 billion over four years--if he succeeds in his attempt to cut taxes. The governor claims that California is “an island of high taxation” and that rates are too high for continued economic growth.

In scrutinizing Wilson’s January budget, the state legislative analyst’s office noted that there is no agreed-on way of comparing California’s tax environment with other states’. When it comes to marginal tax rates, California’s current rate for corporations is generally a flat 9.3%, second-highest among western states, after Alaska (which has a progressive corporate tax structure, so only the biggest corporations pay the highest rates.) Although the income tax levels in per capita dollars and relative to income are higher than other states, California is average when it comes to overall tax burden.

The legislative analyst’s office raised the notion that alternative tax proposals might be considered. These proposals included reducing the rates by a smaller percentage, reducing other rates such as the sales tax or expanding the tax base while lowering the sales tax and others at no overall cost to taxpayers.

These alternatives do not have the simple political appeal of a tax cut. But they do have the appeal of good long-term economic planning. That kind of responsible planning does not make for exciting sound bites, but it’s what the governor and the Legislature are supposed to do.

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Tax Cut Plan

The reduction in state revenues if Gov. Wilson’s proposed tax cuts are adopted.

1996-97: Tax cuts in millions ($540)

1997-98: Tax cuts in millions ($1,880)

1998-99: Tax cuts in millions ($3,360)

1999-00: Tax cuts in millions ($4,510)

3.5-year total: Tax cuts in millions ($10,290)

Source: California Department of Finance.