FLASHREPORT

VOTE NO ON 1A THE “SPENDING CAP” MEASURE (PROP. 1A) IS NOT EFFECTIVE MEDICINE FOR TAXPAYERS

Lewis K. Uhler, President, National Tax Limitation Committee

On February 14th the State Assembly overwhelmingly voted in favor of the spending cap that has become Prop. 1A on the May ballot.  Even most Republicans supported the measure.  But the critical difference between that vote, and what is now contained in Prop. 1A, is the huge tax increase (or extension of the tax increases in the budget) that is now tied to passage of Prop. 1A but was not involved in the February 14th vote.

Whatever one may think of Prop. 1A’s efficacy as a spending cap or a fiscal discipline device on a stand-alone basis, we are now confronted with the reality that Prop. 1A comes with a “price tag” of $16 billion of new (or extended) taxes triggered by its passage and continuing through fiscal year 2012/13.

Therefore, to embrace Prop. 1A as a positive step forward, one has to demonstrate that the spending cap will have a “payoff” in general fund spending reduction of at least $16 billion; but more realistically, that number should be increased to perhaps $20 billion to reflect interest costs because any spending control payoff is likely to be years downstream.

We should also note Democrat leaders of the Legislature, who wrote the title and summary of Prop. 1A as it will appear on the May ballot, deliberately and intentionally sought to mislead California voters by omitting the fact that voter approval of Prop. 1A would trigger this huge additional tax increase.

Can we legitimately say that the spending cap in Prop. 1A will reduce general fund spending in the future below what would otherwise be spent without the cap, let alone by $20 billion?  The threshold difficulty is that neither the California Department of Finance, nor any other potential source of these numbers, is willing to provide out-year revenue projections with which to work.  And the design of the Prop. 1A cap, relying upon a running 10-year average of actual general fund revenues, cannot be used to test the efficacy of the cap without such out-year revenue projections (whereas, a conventional state spending cap, which is predicated on the previous year’s actual spending, adjusted for changes in inflation and population, generates a hard number and a known restraint over the business cycle).

Furthermore, the Prop. 1A spending cap will not, in itself, limit general fund spending.  All that this cap does – if spending ever actually bumps up against this 10-year average revenue trend line – is to require that the excess, or so-called “unanticipated” revenues be placed in a “rainy day fund” – the Budget Stabilization Fund (BSF) and spent according to the rules of the BSF.  So we are left to determine what restraints are imposed on transfers and spending out of the BSF?   The answer is:  very little a taxpayer would like or that is likely to return the $20 billion ± that California taxpayers would fork over in taxes in exchange for the Prop. 1A spending cap.  It is, in fact, a very leaky rainy day fund.  Let’s look at the details:

• First, the very existence of “unanticipated revenues” will trigger further general fund obligations to schools under Prop. 98 which must be satisfied before anything pours over into the BSF.
• If Prop. 1B were to pass, along with 1A (and you can be certain the teachers’ union will spend millions of dollars on the campaign to assure that), K-12 and community colleges would get $1.5 billion out of the BSF each year until they have received a total of $9.3 billion these payments must be made regardless of the state’s financial situation or other payments made to the schools.  So the BSF is simply a conduit for spending nearly $10 billion more on the schools, beyond the regular support out of the general fund.• After the BSF has paid off Prop. 1B, about $1.5 billion or more of state revenues would be paid out of the BSF for infrastructure each year, in addition to other general fund monies spent for this purpose.
• Then come Economic Recovery Bond (passed in 2004) repayments out of the BSF.

Taxpayer relief is an afterthought in the BSF priority lineup.  Prop. 1A is not a “safety net” for taxpayers because there is no assurance it will reduce total general fund spending.  The Legislative Analyst may have put it best:  “The fiscal effects of Prop. 1A are particularly difficult to assess.  This is because the measure’s effects would depend on a variety of factors that will change over time and cannot be accurately predicted.  Consequently, the measure’s effects may be different from one year to the next …”

Clearly, California needs a true spending cap with an ample, safe rainy day fund.  One big risk of Prop. 1A is that if it passes, Californians may be lulled into a false sense of security, delaying the day we might adopt a true and effective cap.  Those of us who helped Ronald Reagan devise the grand-daddy of spending caps – Prop. 1 in 1973 – and its successor – the Gann Limit which passed in 1979 (but was corrupted by Prop. 98 and Prop. 111 in the late 1980s) – stand ready to prepare and launch an initiative effort containing a firm, effective spending cap.

California taxpayers would be ill-served to let a quack remedy (Prop. 1A) stand in the way of the true – and much needed – medicine.  The National Tax Limitation Committee urges a NO VOTE on 1A.
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Lewis K. Uhler is the President of the National Tax Limitation Committee.

You can e-mail Lew Uhler, via the FR, here.