Skip to main content

California Budget Deficit Not a Real Problem

Adam Eran: The bottom line here is that State spending disproportionately goes to lower-income people, while recent tax cuts have disproportionately favored the wealthiest taxpayers.

Columnist Dan Walters writes “California's budget gap is political, not economic,” saying the debate over the state’s deficit as a tempest in a teapot. Walters says the issue is political, not economic because California's deficit is a tiny fraction of its economic output ($1.9 trillion in 2009)--nearly as much as the next two state economies (Texas and New York) combined.

the bill

In that context, California’s $20 billion budget deficit is about one percent economic output, so closing that budget gap with either new taxes or spending cuts would have virtually no impact on California’s economy. Says Walters: “Raising taxes by $20 billion a year or cutting that much in spending would reallocate who gets to spend what by a relatively tiny amount...”

But spending and taxes are equivalent only in the abstract. The wealthy have enjoyed a series of tax breaks for nearly 40 years now, and “trickle down” has become part of the language of economics. The not-so-wealthy have had to pay rising payroll taxes (quadrupling under Reagan and Bush 41), and their real incomes have been flat.

Does government spending really need further cutting? As Joshua Holland points out, in the U.S. “we have a very small government compared to the rest of the developed world -- between 2004 and 2007, the U.S. ranked 24th out of 26 countries in the Organization for Economic Cooperation and Development (OECD) in overall government spending as a share of our economic output. And we also currently have one of the lowest tax burdens -- In 2008, we ranked 26th out of the 30 OECD countries in that category.” Per-capita, California's spending, as I’ve explained in previous articles, has been virtually flat, once you adjust for inflation.

Scroll to Continue

Recommended Articles

Considering the proposed cuts to California's State spending demonstrates the equivalence between taxes and spending is even more outrageous. For example, the Governor recently proposed cutting the trivial amount the state pays home health care workers for the indigent elderly and disabled. This would “save” some money when counted as a spending cut, but the alternative, managed care, is three times more expensive, and the inevitable emergency room visits this would produce would be even more expensive. Would families have to reduce the number of wage earners so people could stay home and take care of the now abandoned elderly or disabled? Of course! But that would save money spent!

Which is not to say current spending priorities are always correct. For example, If the U.S. only spent three times more than its biggest military rival (China) on "defense," we'd have Federal surpluses for the foreseeable future. Meanwhile, just $30 billion would provide the entire planet's population with potable water.

The bottom line here is that State spending disproportionately goes to lower-income people, while recent tax cuts have disproportionately favored the wealthiest taxpayers. How have the wealthy been doing? “A ...research paper by Ian Dew-Becker and Robert Gordon of Northwestern University, ‘Where Did the Productivity Growth Go?,’ gives the details. Between 1972 and 2001 the wage and salary income of Americans at the 90th percentile of the income distribution rose only 34 percent, or about 1 percent per year. … But income at the 99th percentile rose 87 percent; income at the 99.9th percentile rose 181 percent; and income at the 99.99th percentile rose 497 percent.” (from here)

So the wealthy can certainly afford more taxes, and there’s even good evidence the economy does better when they pay even pre-Reagan tax rates. Meanwhile, even modest State spending, like that home health care worker program, disproportionately impacts lower incomes earners.

Adam Eran