Tom Del Beccaro: Coronavirus in California – shutdown worsens revenue woes, so guess what’s coming?
California is making plans to reopen its economy even though many assumed liberal California would be closed longer than most. So why is it planning on opening? Perhaps the reality of its fiscal crisis is too stark for even Gov.Gavin Newsom to ignore.
Just how big is the California state budget? The answer is over $214 billion annually between money that the legislature appropriated and voter-approved bond spending. The next closest state is New York at approximately $180 billion.
For their part, California’s 58 county governments spend over $80 billion per year and its 482 city governments spend about the same. The state also has government entities known as special districts that spend $70 billion per year, transit operators that spend $10 billion annually and transportation planning agencies that spend about $4.5 billion.
All combined, government entity spending in California approaches half a trillion dollars each year. That tally is almost 15 percent of the total state economy and doesn’t include $100 billion in federal funds spent by California’s state government each year.
The problem facing all those California governments is revenue shortfalls caused by the government-mandated shutdowns. The state, and its cities and counties, rely on sales tax, use taxes, hotel occupancy taxes (cities), gas taxes, property taxes (local governments) and business operations taxes. Of course, the state also relies on income taxes.
All of those tax collections will be less than what was budgeted at the start of the current fiscal years. While it is not clear exactly when shutdown in California will be ended, it is clear that at least three months of those expected tax revenues – a quarter of the fiscal year – or more, will be severely impacted.
That impact is highlighted by estimates that one-third or more of California restaurants may not reopen, that car dealerships can only survive between one and three months, and that farmers, who continue to be shorted on water allocations, will have fallow fields — and on and on.
Of course, all of those lost businesses will result in empty storefronts throughout California. Empty storefronts reduce property values, which means lower property tax collections. Keep in mind that California governments collect $75 billion per year in property tax and most of that is paid by business/investment property owners.
Overall, and in very real economic terms, when California does lift its coronavirus shutdown, the state’s economy will be smaller than when the shutdown started – and smaller economies kick off less revenue.
Meanwhile, to deal with the crisis, spending has risen at all levels of government in California. The full amount has yet to be determined.
So, what will California do to combat its economic slowdown and budget deficits? Well, you can expect federal government bailout requests to be made. However, the precedent implications of federal government bailouts of state and local budget deficits limit that possibility.
That leaves tax increases. California already has the highest state sales tax, the highest gas taxes (61.2 cents per gallon), highest income tax, the eighth-highest business taxes (highest in the West, though), and property taxes in the top third of the nation.
Not satisfied with those statistics, on the ballot this fall in California is an effort to raise property taxes. (Apparently, California’s tax lovers and big-spenders want to be first in tax collection in every possible category.)
The goal is to overturn the property tax protections enshrined in Proposition 13, which set off a wave of tax reform throughout the country – a wave Ronald Reagan rode to the White House. Under Prop 13, property taxes are set at one percent of a property’s market value at the time of acquisition and annual increases are limited to no more than 2 percent per year.
According to the proponent’s estimates, property tax receipts could increase by as much as $12 billion – more revenue than the budgets of 12 states. In other words, they want to extract $12 billion out of the private sector as it struggles with the shutdown aftermath.
Raising taxes during a weak economy is like handing weights to struggling swimmer. Keep in mind that California already ranks at the very bottom of places to start a new business. As an attorney who has represented small businesses in this state for over 30 years, I can tell you the struggle is real.
Extracting $12 billion more out of landlords with empty storefronts and mortgages to pay, is a recipe for further economic decline, lower property values and, therefore, lower tax receipts. In other words, the tax increase will make fiscal matters even worse for California governments over time.
That Prop 13 battle will only be the beginning, however. Cities, counties and the state, with their $750 billion-plus infrastructure deficit, their even worse long-term pension shortfalls and other debts won’t stop there in their quest for new revenue.
California is leading the states in government spending, taxes, debt and the need to solve budget deficits. We can only hope that “so goes California,” won’t mean so goes the nation.