The Golden States is not so glittery right now. It seems that the special election yesterday went just as I expected, the propositions to extend taxes, borrow from the lottery, and divert funds were all rejected. The only thing that passed was 1F, which restricts raises on state legislators, and this would not save much money at all. So now what? Many are saying that California will need a federal bailout since the state is facing a $21 billion deficit. Here are some of my thoughts on the issue.
My feelings on a federal bailout is somewhat mixed. First of all, I feel that Californians deserve some payback from the federal government because for years we have been paying more taxes than what we get back. As I have written before, the Tax Foundation estimates that California gets 79 cents for every dollar we ship to the Feds. This has been going on for many years, and California’s GDP is by far the largest in the Union, so perhaps California deserves to be bailed out due to its contributions to this nation.
Of course, if the bailout happens due to the reason I cited above, then other states like New York, Massachusetts, and New Jersey may just line up for a bailout as well since they have also been getting a lot less federal money back than what they put in. All the other states would of course be quite furious. The bailout may also make California more dependent on the federal government, and that
is never a good thing.
One big reason why I would be against such a bailout is that California’s main problem comes down to the simple fact that the entire system is living beyond its means and throwing more money at it is not the solution. The legislators do not seem to know how to budget for the future. It seems that the budgets are based on an assumption that things are always going up, and as a result programs are established in the boom years and never cut in the lean years. Californian voters also hate to cut any services they already have and also hate taxes so the balance between income and spending becomes out of whack.
Someone at the top has to look at the state programs right now line by line and
cut anything that looks redundant and useless. The state’s credit ratings are not exactly stellar so the only choice is to cut things as soon as possible. I actually support Governor Schwartzenegger’s effort to cut services and state employees right now because there is really no other choice. In lean times like these individual families live without luxuries such as eating out or even birthday presents, and the state needs to do the same.
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4 comments ↓
Agreed! You often write what I am thinking.
Mish from Global Economic Trend Analysis did a California budget: http://globaleconomicanalysis.blogspot.com/2008/01/mishs-california-budget-proposal.html
I’m a fan of this, even though special-interest groups will have out their pitchforks. Our 1997 budget fits within the money we make now. As far as I am aware, we all lived pretty well in 1997, so just rolling back the clock is another (easier) solution.
-Erica
Perhaps the rational individual response to situations such as the current one in California is to vote with your feet–i.e. enjoy the great public services available because they run deficits, and then move to another state when they have to cut services and raise taxes to pay the debt.
Illinois, the state I live in, will face a similar situation. It has a huge (and underfunded) pension system for state university employees–but making those pension payments is required by the state constitution. Rather sooner than later, they’ll have to do something to close the gap.
I must admit that I’ve never really followed my own advice–but I might, if things get bad enough. Similarly, it seems quite possible that lots of people in California will. (Different people, depending on exactly how California closes the budget gap–people with kids if they cut school funding, people with high incomes if the raise income taxes, etc.)
I believe that California was warned that this was a bubble in 2005 and didn’t bother to have a rainy day fund. They are idiots in Sacramento.
Can a state go bankrupt? I have a feeling Californians will find out. As a Californian resident I am taking practical measures by increasing my state tax deductions. Not sure California will refund over paid taxes this year …
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