With all the drama focused on DC where the political marketing machine on steroids has us envisioning the horrors of careening off a “financial cliff,” the focus should be in California, as we are actually the pace car for the states racing behind us. In that vein, to begin 2013 there is good and bad news to report regarding “California’s Fiscal Cliff” which could help the nation avoid the collision, as we race toward the precipice. And, as usual, because elections matter, there is action that you can take to help us pave the safe landing beyond.
The good news is that like it or not, we finally have a Governor. In my humble opinion, our state has not been governed since the days of Governor Pete Wilson. The bad news is the policies, such as raising taxes to redistribute wealth, lack of regulatory oversight and control, transferring state prisoners to county jails, government support of favored industries, and continuing with unfunded, unnecessary big-labor mega-projects, such as the high speed rail (for which no complete business plan or funding exists) seems the antithesis to what we need to stimulate private sector job creation. Unemployment and ever-increasing government payrolls and services will continue to be a drag on our recovery. Click here for an informative piece on dependents outnumbering those with private sector jobs.
However, we do finally know who is running the state and where negotiations need to begin, and it’s not the Legislature. The good news is regardless of the Democrat Legislative supermajority that is billed as omnipotent, I feel confident in asserting that there will be no veto overrides of what Governor Brown chooses to veto. He is firmly in charge and will determine the direction of the state. The Governor has also shown selective pragmatism with regard to reviewing the impacts on businesses of environmental regulatory burdens, and may offer the best hope for a more balanced approach.
Unfortunately the financial impact of the November election for private businesses large and small is that the tax burden and/or cost of doing business in California has risen. We now have the dubious distinction of the highest income tax (13.3%) and sales tax (7.5%) in the nation, second highest gasoline tax (68.9 cents per gallon), and the highest corporate tax rate in the West (8.84%). Thanks to Proposition 13, our property tax rate is ranked only 15th highest in the nation (that’s the good tax news). While I would not expect to see any changes to Prop 13, even for business properties for political reasons, I would expect to see a push to lower the parcel-tax threshold from 2/3 vote to 55% to fund a multitude of “assessments” on property owners for local services, such as education and public safety.
On the flip side, the good news is that we have reduced what I term our “structural deficit” or Jerry’s inherited “mountain of debt” by $10 billion, or from $35 billion to $25 billion. As I analyze the data, the reduction was accomplished through accounting, or funding the $10 billion in education funding that was “deferred” last fiscal year. You may recall that school districts were encouraged not to decrease budgets, and to comply they were forced to borrow, to fill the gap for one year. I’d assume school districts that made a one-year loan to the state may now repay their debt.
Another bit of good news is that in spite of all the hype by the California Air Resources Board, the Cap and Trade Auction was a non-event. You may recall that the regulators and Legislature were anticipating billions in revenue to fill the budget gap, fund “green” projects and even potentially collateralize a future revenue stream to fund future high speed rail adventures. The price range of each certificate or “carbon credit” was anticipated to sell between $10-50 per credit. The auction actually yielded $10.09 on average – so ratepayers and taxpayers can rest assured for the moment that the effect on the price of water, power and other products should be minimal. There was a business-wide outcry to halt or delay the auction which resulted in many simply remaining on the sidelines. Negotiations with the Governor may have also played a part in the business decision to observe the first auction from afar. Due to appeals from businesses statewide, Democrat and Republican Legislators requested that the Governor insist on “free allocations” to alleviate increasing business costs.
The education cliff drama is still playing out. While the tax increase was supposedly to avert cuts to education, if your schools are suburban (post Prop. 13) or in a basic-aid school district, heads up. Redistribution of your property tax dollars to the less-fortunate is slated to be part of the budget package this year. The Governor’s proposal appears to be a reduction in the “minimum” funding level so that more of our property taxes are allocated to the state Prop 98 pool (ERAF). This means a “CUT” for those of us in districts where our property taxes fund our “minimum” and we receive very little to no Prop 98 (or state backfill). To balance the state cut, you can expect to be encouraged to vote for “property parcel taxes” to fund the children. See here for an article on the new proposed funding system.
The good news is there is still time for you to impact the budget trailer bills being proposed. Coming off of the recent tax hike, please encourage your school boards and educators to ask the Governor to defer the education funding changes, as he did last year. This will be a bipartisan issue; hopefully we can work together to save our education funding and improve education results statewide. Since the passage of Prop 13 newer developed areas (primarily in Southern California) have seen an increase in Homeowners Associations, Mello Roos, Tollroads, local sales tax increases for transportation, special assessment districts, etc. that have become a de-facto increases in property taxes, offsetting what used to be funded by city, county, and state taxes. It’s time to call a halt and reassess our options for our future and the future of California.
So in 2013, once again, for better or worse, California will lead the nation. We have much work to do, and I anticipate that working together we can not only avert the “Cliff” but pave a solid road for a safe landing beyond it. Stay involved and informed and together we can work towards a prosperous and Happy New Year!