Tuesday, January 27, 2009

I hope you are not owed money by the State of California

That's right. The world's eighth largest economy is out of money and cannot pay its bills:

Facing a $42 billion budget deficit, State Controller John Chiang told the Sacramento Bee he has already borrowed $21.5 billion to try to cover the state's checks, but by Feb. 1, there will be no more options left but to simply stop paying some of the bills – including tax refunds, welfare checks, student grants and other payments owned to California citizens.
So, if you are owed money, you get an IOU. That's right. An IOU. I don't have much ground info yet on how Californians are feeling, other than perhaps that they want bailout money now.

(And no, Chapter 9 does not apply to states, or at least I don't think it does. I am a dirt lawyer, not a BK guru.)

Of course, one solution is ugly: raise taxes, especially property taxes. You have a Proposition 13 problem there of course, but I have always been a bit confounded by the fairness of Prop. 13. You can have two people with identical properties paying highly disparate taxes simply based on length of ownership.

Not that things are much better in Illinois. Here's an example of pharmacies not being reimbursed.

Thanks to Ken Nowak for pointing this story out.


CountingSheep said...

In California, we don't have a tax problem, we have a spending problem. We are paying twice as much in taxes now as we were in the 1960s. In the 1960s over 20% of the budget went for infrastructure building things like the aquaducts, our University of California system, dams, roads, etc. The dams were producing so much electricity that they spoke about getting rid of electric meters because electricity was so inexpensive.

Now we have retire at age 50 retirement programs that drain a lot of money.

But on Prop. 13, that is actually the most fair system. Most property tax money goes to schools. Granted, if you don't have kids you are burned, but most families buy their home when they are young and have children in the schools. As they get older, there tax increases are not too high and of course are not quite the burden on the school system as when they were young. I would never give up any of the protections of Prop.13.

David Stejkowski said...

I see your points. And as an ex-Californian I think the tax system is confiscatory. But even here where income tax is low (for now), I pay very high property taxes and, lacking kids, see very little return for it.

And California's schools, once the best in the nation, aren't anymore.

You also make a very good point that it is hard for older people to pay taxes based on today's values. But what happens when the money runs out? It seems much of the budget is consumed by mandates. Is there a legal action for mandamus that lies for the people with IOUs? Can a tax hike be compelled? I don't know.

I agree, by the way, that spending cuts are in order. Philosophically, I am not a fan of increasing taxes on anyone. But if a tax hike is in order to save the state (and I hope it isn't), what is the fairest way to raise the money?

CountingSheep said...

I really don't know what the answer is. Tax increases historically backfire and just drive business out of California.

But if you implemented all of the tax increases the Democrats want, and all of the spending decreases the Republicans want, you still would not even be close to balancing the budget.

The only solutions to the problems would have had to be implemented six years ago. At that time, we recalled Gov. Gray Davis because of his recless spending and elected Arnold Schwarzeneger. Schwarzeneger thought the solution was more spending and here we are today.

If we had elected Tom McClintock as Governor we would not be in this mess today. Tom won his race to go the the US Congress by the way. It was close! But he made it.

LVTfan said...

Many think that the answer to "what should we tax, and how should we do it?" is that we ought to tax land value.

Not buildings. Not wages. Not sales. Just land value.

And treat every landholder just as if we believed that everyone is created equal, and should be taxed in proportion to the value of the land they own.

Those who live on a tiny, out-of-the-way lot, off the grid, far from highways and public transportation, with inferior schools, should pay a tiny amount in taxes.

Those who occupy a large lot with fine views, close to high-paying jobs, served by excellent schools and emergency services, would pay far more in taxes ... proportionate to the value of the land they own.

Those who own fine downtown property would pay, not in proportion to the buildings' value, but in proportion to the value of the land it sits on, whether it is a diner or a highrise, or even a golf course.

No special treatment. No one subsidizing his neighbors. Opportunity for all. Far less need for poverty programs or other things we need when we have poverty and joblessness.

And a steady, logical revenue flow to finance schools, emergency services, courts, infrastructure and all the other goods and services which make California communities good places to live.

CountingSheep said...

"Those who live on a tiny, out-of-the-way lot, off the grid, far from highways and public transportation, with inferior schools, should pay a tiny amount in taxes."

I disagree. The teacher at the "inferior school" will still be paid the same as any other school.

I have a new client who was a state employee. Just retired at age 57. We can't afford to pay retirement benefits from age 57 on. Many get to retire at age 50. And they are exempt from Social Security taxes.

We don't need more taxes. We need to privatize state services and end the war on drugs. I am not opposed to all tax increases. I do think recreational drugs should be taken out of the black market and taxed. We need to get the dealers out of our schools and neighborhood parks. But the prison guard unions will never go for that. They will just advocate higher taxes.

A Voice of Sanity said...

If you tax on the unimproved value of land you never see abandoned building jobs or empty lots. Something gets built quickly to pay the taxes.