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California’s problems provide lessons for other administrations

Free Market Foundation

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When times were good, many U.S. states spent their tax surpluses and ignored the need to save for rainy days. They are now paying for their profligacy and short-sightedness – and none more so than California, which is looking at a $25 billion shortfall in revenues over the next 18 months.

  • When billions of dollars in income tax revenues were pouring in during the 1990s, California lavished generous raises on state employees, expanded health-care benefits for the poor, cut taxes on car licenses and spent heavily on education and transportation.
  • Now Governor. Gray Davis (Democrat) has been forced to announce a series of steps intended to save $10.2 billion to plug a deepening hole in the current budget and to serve as a prelude to even deeper cuts in next year’s.
  • He would freeze pay for state workers, kick as many as 200,000 people off the state’s Medi-Cal programme and reduce payments to public schools and universities by more than $3 billion – and probably increase taxes next year.
  • The state’s non-partisan Legislative Analyst’s Office has warned that revenues are so far short of spending that the state will run deficits of $12 billion to $15 billion for the next five years – and that’s even if the economy recovers.

    California has a highly progressive “tax the rich” policy that backfired and worsened its fiscal mess. The top 10 percent of taxpayers pay 75 percent of personal income taxes. So when their income drops – as it did when the technology boom went bust in early 2000 – the state treasury crashes.

    Source: John M. Broder, California Is at Fiscal Brink After Boom’s Billions Vanish, New York Times, December 9, 2002.

    For text http://www.nytimes.com/2002/12/09/national/09CALI.html
    For more on State Taxes & Economic Growth http://www.ncpa.org/iss/eco/

    FMF Policy Bulletin/11 December 2002

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