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Tackling California's Budget Crisis: Raise Taxes, Cut Programs, or Form a Bank?
May 8, 2024 | by Ellen Brown
In 2022, the state of California celebrated a record budget surplus of $97.5 billion. Two years later, according to the Legislative Analyst's Office, this surplus has plummeted to a record budget deficit of $73 billion. Balancing the budget will be challenging. Unlike the federal government, the state cannot just drive up debt and roll it over year after year. The California Balanced Budget Act, passed in 2004, requires the state legislature to pass a balanced budget every year.
The usual solutions are to cut programs or raise taxes, but both approaches are facing an uphill battle. Raising taxes would require a two-thirds vote of the legislature, which would be very challenging, and worthy public programs are in danger of getting axed, including homelessness prevention and funding for low-income housing.
A third possibility might be to increase the income tax base and state income by stimulating the economy with a state-owned depository bank. The state-owned Bank of North Dakota, which has raised record profits for its state, is a stellar example. In a review of states with the healthiest budgets based on data from the PEW Charitable Trusts, U.S. News & World Report puts North Dakota at No. 1 in Budget Balancing and #1 in Short-term Fiscal Stability.
California has an Infrastructure and Development Bank, which is already capitalized and has an established track record of prudent and productive lending, but it is not a depository bank and its reach is small. Transforming it into a depository bank would be fairly uncomplicated and could substantially increase its reach.
But first a look at what happened to the state's copious revenues.
California's record surplus was largely due to tax windfalls and to $43.5 billion received in American Rescue Plan money during the COVID crisis. Anticipating that these inflows would continue, the governor and legislature enacted a record budget for 2024-25 of nearly $300 billion, the largest of any state. Much of the surplus was committed to expanding an array of social and educational services, including extending universal health care coverage to undocumented immigrants. When taxes came in, the tally showed a revenue shortfall of $26 billion.
Tech industry woes were a major contributor. The top 1% of earners pay nearly half of California's income taxes, and 20% of its GDP comes from the tech industry. The collapse of Silicon Valley Bank, which financed startups and attracted venture capital, speeded the sector's decline. Massive Silicon Valley layoffs occurred and tech stock lost value, cutting capital gains taxes. And there has been a notable exodus from the state not just among the ultra-wealthy but by businesses, due to the combination of high taxes, stringent regulations, and elevated costs for labor, utilities, and energy.
Another contributor to the budget deficit were huge payouts for unemployment benefits, which skyrocketed during the COVID lockdown and business shutdowns. The state's unemployment fund was exhausted, requiring a loan from the federal government. Twenty-one billion dollars remains to be repaid, and the interest rate on the debt has gone up. To meet the unemployment burden, California legislators are considering quintupling unemployment taxes and nearly doubling benefits, but the result could be more layoffs and more businesses leaving the state.
Meanwhile, the wealth divide in California is enormous, with the highest unemployment rate and homeless rate in the country. This is despite $24 billion being spent on the unhoused over the last five years. Thirty percent of the nation’s homeless live in California, and nearly nine million Californians are on the brink of being homeless. Housing is too expensive for low-wage earners and there is a lack of available low-cost housing. But well-meaning legislation to help low-wage earners has had unintended consequences.
A third possibility might be to increase the income tax base and state income by stimulating the economy with a state-owned depository bank. The state-owned Bank of North Dakota, which has raised record profits for its state, is a stellar example. In a review of states with the healthiest budgets based on data from the PEW Charitable Trusts, U.S. News & World Report puts North Dakota at No. 1 in Budget Balancing and #1 in Short-term Fiscal Stability.
California has an Infrastructure and Development Bank, which is already capitalized and has an established track record of prudent and productive lending, but it is not a depository bank and its reach is small. Transforming it into a depository bank would be fairly uncomplicated and could substantially increase its reach.
But first a look at what happened to the state's copious revenues.
Saga of a Budget Crisis
California's record surplus was largely due to tax windfalls and to $43.5 billion received in American Rescue Plan money during the COVID crisis. Anticipating that these inflows would continue, the governor and legislature enacted a record budget for 2024-25 of nearly $300 billion, the largest of any state. Much of the surplus was committed to expanding an array of social and educational services, including extending universal health care coverage to undocumented immigrants. When taxes came in, the tally showed a revenue shortfall of $26 billion.
Tech industry woes were a major contributor. The top 1% of earners pay nearly half of California's income taxes, and 20% of its GDP comes from the tech industry. The collapse of Silicon Valley Bank, which financed startups and attracted venture capital, speeded the sector's decline. Massive Silicon Valley layoffs occurred and tech stock lost value, cutting capital gains taxes. And there has been a notable exodus from the state not just among the ultra-wealthy but by businesses, due to the combination of high taxes, stringent regulations, and elevated costs for labor, utilities, and energy.
Another contributor to the budget deficit were huge payouts for unemployment benefits, which skyrocketed during the COVID lockdown and business shutdowns. The state's unemployment fund was exhausted, requiring a loan from the federal government. Twenty-one billion dollars remains to be repaid, and the interest rate on the debt has gone up. To meet the unemployment burden, California legislators are considering quintupling unemployment taxes and nearly doubling benefits, but the result could be more layoffs and more businesses leaving the state.
Plagued by Homelessness and Unemployment
Meanwhile, the wealth divide in California is enormous, with the highest unemployment rate and homeless rate in the country. This is despite $24 billion being spent on the unhoused over the last five years. Thirty percent of the nation’s homeless live in California, and nearly nine million Californians are on the brink of being homeless. Housing is too expensive for low-wage earners and there is a lack of available low-cost housing. But well-meaning legislation to help low-wage earners has had unintended consequences.
As of April 1, the minimum wage for fast food restaurant workers was raised by 25% to $20 an hour triggered by a strike by their union. But the move has negatively impacted many of the workers. Fast food restaurant owners operate on thin profit margins; and to cover these new costs, they have had to reduce workers’ hours, raise customer prices, engage in massive worker layoffs, move out of state, or close their businesses altogether. Almost 10,000 fast food jobs have been lost in California just since the $20 minimum wage law was signed.
As a result of these and other efforts to help low-wage earners, many vulnerable workers are suddenly finding or will find themselves out of a job.
At the other end of the employment spectrum is North Dakota, which has the lowest unemployment rate in the country. As noted above, in a review of states with the healthiest budgets, U.S. News & World Report puts it at No. 1 in Budget Balancing and #1 in Short-term Fiscal Stability. North Dakota's budget for 2024-25 includes cuts in individual income taxes, including eliminating the state individual income tax for 60% of the population and a reduction in that tax for the other 40%. The result is projected to be a 1.5% flat rate income tax, the lowest in the nation. Again compare that to California, where the top state income tax is 14.4%, higher even than other states known for their tax burdens.
North Dakota was the only state to fully escape the 2008-09 credit crisis, never slipping into the red. When the state did go over budget in 2001-02 due to the dot-com bust, the Bank of North Dakota (BND), the nation’s only state-owned bank, acted as a rainy day fund. To make up the budget shortfall, the bank declared an extra dividend for its state owner, and the next year the budget was back on track.
Please go to Web of Debt to continue reading.
As a result of these and other efforts to help low-wage earners, many vulnerable workers are suddenly finding or will find themselves out of a job.
Compare North Dakota
At the other end of the employment spectrum is North Dakota, which has the lowest unemployment rate in the country. As noted above, in a review of states with the healthiest budgets, U.S. News & World Report puts it at No. 1 in Budget Balancing and #1 in Short-term Fiscal Stability. North Dakota's budget for 2024-25 includes cuts in individual income taxes, including eliminating the state individual income tax for 60% of the population and a reduction in that tax for the other 40%. The result is projected to be a 1.5% flat rate income tax, the lowest in the nation. Again compare that to California, where the top state income tax is 14.4%, higher even than other states known for their tax burdens.
North Dakota was the only state to fully escape the 2008-09 credit crisis, never slipping into the red. When the state did go over budget in 2001-02 due to the dot-com bust, the Bank of North Dakota (BND), the nation’s only state-owned bank, acted as a rainy day fund. To make up the budget shortfall, the bank declared an extra dividend for its state owner, and the next year the budget was back on track.
Please go to Web of Debt to continue reading.
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