Stop looking to feds to cure California’s budget crisis
Our political leaders trot out new and more creative excuses for their failure to get the state’s fiscal house in order every day, but one hardy perennial was recently aired again by Gov. Arnold Schwarzenegger.
This is the notion that California is running a budget deficit because we pay more in federal taxes than we get back in federal spending.
Schwarzenegger and the legislative leaders made a pilgrimage to Washington on this theme last week. The governor’s claim was that the state receives only 78 cents back for every dollar of federal tax we generate, so somehow we’re “subsidizing” the states that get more and incurring red ink in Sacramento in the process. The economics of the state budget deficit being of great interest to individual taxpayers and business owners alike, it’s proper to subject this claim to some scrutiny.
Whether there’s even factual grounds for the governor’s claim is subject to debate. His number dates from 2005, and the formula underlying it has been criticized for supposedly overestimating tax payments. (The Washington-based Tax Foundation, which created the formula, defends its methodology.)
Last week, U.S. Sen. Barbara Boxer shot back that while California may indeed have been a “donor state” in the past, at the moment it’s a recipient state to the tune of about $1.45 in inflow for every dollar in federal taxes paid.
The change is due to two factors, she contends: The recession has reduced the federal taxes owed by Californians, while the economic stimulus package is bringing a total of $85 billion in new federal funds to the state this year and next.
The real issue, however, is not the accuracy of Schwarzenegger’s figure, but its relevance. Relevance to what, you ask? Well, relevance to anything. To begin with, in terms of political leadership, complaining that a state’s return on federal taxes contributes to its fiscal deficit is the last resort of the spineless.
The biggest cause of the state deficit, currently about $20 billion, is Schwarzenegger, who hollowed out the revenue stream by $5 billion to $6 billion a year by cutting the car tax in 2003 without coming up with a substitute. His ideas for fixing the state’s tax and budget process have been as bankrupt as, well, the state government.
In a letter to the state’s congressional delegation last week seeking a $6.9-billion federal handout, the governor said “California lawmakers have done nearly everything that can be done to address this historic fiscal crisis.” This is true, if you define “nearly everything that can be done” as “almost nothing.”
Obviously, suggesting that this state, or any state, be permanently guaranteed a positive return on federal taxes is not an adult approach to governing, as the basic math of a permanent net inflow for every state of the union doesn’t exactly pencil out.
Schwarzenegger has been promising to collect our fair share since he took office -- he proclaimed himself “the Collectinator,” remember -- so it’s proper to examine why some states consistently collect more than others.
Two factors dominate, said Bill Ahern, director of policy at the Tax Foundation. These are, first, the progressive structure of federal tax and, second, the huge share of federal spending that goes to the poor, elderly and infirm. Safety net programs, Social Security, Medicare, and retiree and veterans payments accounted for 58% of the federal budget in fiscal 2008, according to the Washington-based Center on Budget and Policy Priorities.
What this means, Ahern explains, is that states with relatively numerous high-income residents (California, for example) and relatively low percentages of poor and elderly residents (California, for example) will always tend toward a structural deficit in their federal yield.
“No number of military bases or other goodies is going to make up for having a disproportionately large number of high-income people,” he told me last week. “And since most federal spending is demographically determined to favor the elderly and poor, wherever those populations are disproportionately large, federal spending flows will overwhelm tax payments.”
Another important factor is the size of the state. The 3,000-employee FBI campus Sen. Robert Byrd (D-W.Va.) snagged for his home state (population 1.8 million) tilts its federal balance of payments into the black -- the Tax Foundation pegged it at $1.76 in 2005 -- a lot more than it would have been if it were dropped into California (pop. 37 million).
One state Schwarzenegger whines about, New Mexico (supposed federal return per dollar of tax: $2.03; pop. 2 million), gets a huge bang for the buck from its two national laboratories, Sandia and Los Alamos. If the governor is so concerned about New Mexico, let’s see him offer to move Los Alamos here -- wouldn’t it be fun watching him try to find a California community willing to host a secret research program dealing with nuclear weapons?
The Tax Foundation has always been a bit “ambivalent” about its federal tax study, Ahern says, because once you get past the progressivity of federal tax and the demographic structure of government spending, “there are not that many implications for policymakers. . . . The ‘Collectinator’ idea, that Schwarzenegger was going to change this ratio, was always mistaken.” The group hasn’t produced the study since 2006, when the staff member who crunched the numbers moved on.
One point that Schwarzenegger didn’t acknowledge in his letter is that California collects a healthy share of federal revenues in some categories, such as the military budget. While contributing about 12% of federal tax revenue, the state accounted for 13% of all military procurement contracts in 2005 and 12% of total military expenditures, ranking first in the nation on both counts.
This also reflects something of an immutable law. “No one’s going to put a naval base in Kansas,” Ahern observes.
It’s certainly fair to say, as the governor does, that California gets shortchanged in some ways. The government’s Medicaid reimbursement formula is widely considered a mess, although Schwarzenegger’s claim that fixing it would give the state $1.8 billion more a year “to balance our budget” is, to say the least, real questionable.
It’s also true that the federal government doesn’t come close to covering the local costs of illegal immigration. U.S. Sens. Boxer and Dianne Feinstein placed the cost just of incarcerating those caught committing crimes in California at more than $800 million last year, net a modest reimbursement from the federal government.
Both these issues come under the heading of unfunded federal mandates. The problem with making a federal case out of them is that almost every state, county and city can cite its own. The cost of federal clean air regulations, or the minimum wage, or commuter train safety rules, or school desegregation orders might bite deeper in some places than in others. In Congress, all these complaints from the folks at home are likely to just cancel each other out.
Nor do they change the basic truth that Schwarzenegger and the legislative leaders tried to obscure in their Washington junket last week: The California budget crisis is home-grown, and it’s up to them to solve it.