Tuesday, July 7, 2009

Why Is California Collapsing ???

Over the past couple of days I have come across two articles with very different diagnoses of California's fiscal crisis. One article, by Kevin O'Leary in Time Magazine, lays the blame for the crisis on Proposition 13, a Constitutional Amendment approved by California voters in 1979 that limits the property taxes that localities may levy. Because of Prop. 13, the argument goes, the state legislature must appropriate more and more money for projects and activities, such as public education, normally funded at the local level. As a result, the state has no little money left over for projects at the state level ordinarily funded by the state legislature.

A second article, by Kevin Hasset of the American Enterprise Institute, argues that California's troubles are the result "an orgy of spending" leading to its $26 Billion deficit. Having stated this conclusion, he then argues that California's experience is a cautionary tale for President Obama and his various expensive proposals.

O'Leary's hypothesis is shared by many, but it is only that, a hypothesis. Moreover, it is subject to a simple empirical test. The theory implies that states like California would derive less tax revenue overall, because of the Proposition 13 constraint, than states without such a restraint, thereby explaining the "gap" between spending and revenues in California. (After all, if California obtains more tax revenue from its citizens that other states, then the distribution of those receipt between state and local government should not logically impact the state's ability to provide services equal to the value of such revenues.) The theory also implies a subsidiary thesis, namely, that in California, local spending would constitute a smaller portion of overall state and local spending combined than in other states.

The data are inconsistent with both predictions and thus seem to falsify the O'Leary hypothesis.

According to the U.S. Census Bureau, California raised $236,646,725,000 in state and local revenue in during the 2005-2006 fiscal year, when its population was 36.1 million. That's $6,555 per person. (2005-2006 is the most recent year for which data are available at the census website.)  By contrast, during the same fiscal year, Utah raised $13,275,165,000, on a population of 2.5 million, for a total of $5,310 per person.

That is, California raised 23 percent more revenue per person than Utah in 2005-2006.

Utah, it should be noted, is not idiosyncratic. During the same period, Virginia, with a population of 7.5 million in 2005, raised $44,144,819,000, or $5867 per person, a figure closer to Utah than California. Indiana's tax revenue was also less than $6,000 per person. Here is the Census website, with the data on revenues and spending. 2005 population figures come from other reliable sources, e.g., Census press releases and a report from a think tank at UVA.

Note that a different source puts California per capita taxes in 2005 at $7,253.00, compared to $5,889.10 for Virginia, $5,811.8 for Utah and $5,710.10 for Indiana. Again, California's per capita spending is between 23 and 27 percent higher than that in Virginia, Utah and Indiana respectively.

What about the subsidiary thesis, i.e., that California localities will collect a smaller share of overall state taxes than localities in other states ? Here again, the data apparently contradict the O'Leary thesis. According to data on the same website listed above, California localities derive a LARGER share of overall state tax revenue than the localities in the other three states mentioned. Here are the figures, i.e., the percentage of overall state tax revenue taken at the local level, in the 2005-2006 fiscal year.

California 43 percent.

Virginia 41 percent
Indiana 41.8
Utah 36 percent.

Absent some equivalent to Proposition 13 in these three states, one must respectfully disagree with Mr. O'Leary' hypothesis. Spending, not some inability to tax, is the problem in California.
Note also that, from 1992-2004, a period with relatively low inflation, total state spending in California nearly doubled, according to from $123.9 billion, to $240.2 billion. It's hard to characterize California as a low tax state.