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Sweden or Mississippi?

Californians must choose: lower taxes or more services.

February 24, 2008|William Voegeli | William Voegeli is a visiting scholar at Claremont McKenna College's Henry Salvatori Center.

Thesauruses were coming off bookshelves last week. Editorial writers in California were searching to find the strongest word possible to condemn state Republican legislators who refused to close a loophole that allows buyers of private planes, yachts and recreational vehicles to avoid paying sales tax on their expensive toys. Depending on which editorial page you read, the Republican position was "indefensible," "ludicrous" or "unconscionable."

A two-thirds majority vote in both houses of the Legislature was necessary to close the tax loophole -- or "sloophole," as Democrats scornfully called it. The Senate had earlier voted to end the tax break -- but not enough Assembly Republicans joined Democrats to close the deal.

All the indignation missed a small point and a large one. The small point is that, whatever public relations advantage it might give Democrats, closing the “sloophole” would have generated revenue that amounted to barely a rounding error compared with the size of the state's budget deficit. The optimistic projection is that eliminating it would produce $5 million in the current fiscal year and $21 million in the next and each year thereafter. It's optimistic because "closing" the loophole wouldn't, well, close the loophole. The proposed fix would only change the waiting period from 90 days to a year. Yacht buyers could simply park their new vessels along the Oregon coast for an extra 275 days and still avoid paying the sales tax.

The larger point in the "sloophole" ruckus is that our politicians' failures have little to do with how we got into this fiscal crisis and how we'll get out of it. In a democracy, few shortcomings ascribed to politicians cannot be traced back to the voters, and California voters have sent contradictory messages. Is California going to be a high-benefit/high-tax state, or a low-benefit/low-tax state? In other words, are we going to be Sweden or Mississippi?

Californians have had a rolling referendum on this question for decades, expressing themselves in elections for state officials and ballot initiatives. The results are in: What the people really want is for California to be a high-benefit/low-tax state, one that provides Sweden's safety net but only imposes Mississippi's taxes. As Assembly Budget Committee Chairman John Laird (D-Santa Cruz) wrote in this newspaper in November, the voters "won't stand for" huge budget cuts, yet they won't support big tax increases either.

If you take those options off the table, the fallback position is for the legislators to find billions of quarters in the Capitol's sofas. Having ruled out lower spending and higher taxes, we don't give politicians a compelling reason to do anything more grown-up than posture over a microscopic sliver of the state budget -- like the $26 million that would be produced by closing the "sloophole," which amounts to less than one-sixth of 1% of the projected $16-billion shortfall over the next two years. When politicians are required to square the circle, it's no surprise that a lot of them wind up sounding crooked.

Wanting to pay the Kia sticker price and drive home in a BMW is wishful thinking, but it's also human nature. No shopper would reject that deal. California's problem has been that when the state economy is strong, the too-good-to-be-true fantasy seems true: We can have generous public programs without onerous taxes. The hope that this happy arrangement will go on and on turns into the expectation that it will -- and then the demand that it must. The technical reason for the budget "crisis" caused by every economic downturn is known as "reality."

During the long economic boom after World War II, California embraced the idea of a large and growing public sector enthusiastically. According to Peter Schrag, author of "Paradise Lost," no other state "had ever invested in public services and development as California did in the 1950s and 1960s." The most avid champion of this was Pat Brown, the Democratic governor from 1958 to 1967, who expanded public programs and built the state's infrastructure.

The repudiation of Brown's vision came in 1978, when California voters overwhelmingly passed Proposition 13, championed by the anti-tax activist Howard Jarvis. In 1977, the year before the property-tax-cutting measure was approved, 12% of Californians' personal income went to pay state and local taxes, according to the Tax Foundation, a nonpartisan tax research organization based in Washington. Only four other states had a higher tax burden. In 1979, the percentage dropped to 9.2%, the 25th-highest tax burden in the country.

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