Wikinvest Wire

A constantly renegotiated bargain

Monday, November 02, 2009

California's high benefit/high tax model of government - a subject that was once very near and dear to my heart, but one that now only generates casual interest since we left the state earlier this year - is examined by in this report in the Los Angeles Times.

In America's federal system, some states, such as California, offer residents a "package deal" that bundles numerous and ambitious public benefits with the high taxes needed to pay for them. Other states, such as Texas, offer packages combining modest benefits and low taxes. These alternatives, of course, define the basic argument between liberals and conservatives over what it means to get the size and scope of government right.

It's not surprising, then, that there's an intense debate over which model is more admirable and sustainable. What is surprising is the growing evidence that the low-benefit/low-tax package not only succeeds on its own terms but also according to the criteria used to defend its opposite. In other words, the superior public goods that supposedly justify the high taxes just aren't being delivered.
One way to assess how Americans feel about the different tax and benefit packages the states offer is by examining internal U.S. migration patterns. Between April 1, 2000, and June 30, 2007, an average of 3,247 more people moved out of California than into it every week, according to the Census Bureau. Over the same period, Texas had a net weekly population increase of 1,544 as a result of people moving in from other states.
In the years before we left, we heard many stories of people moving from California to Texas but none about people moving the other direction.

At one point, even your average homeowner could sell his house in the Golden State and, with the profits, buy a brand new 3,500 square foot place in Texas on an acre of land.

This doesn't happen much anymore (for obvious reasons), but people are still leaving.
These folks pulling up stakes and driving U-Haul trucks across state lines understand a reality the defenders of the high-benefit/high-tax model must confront: All things being equal, everyone would rather pay low taxes than high ones. The high-benefit/high-tax model can work only if things are demonstrably not equal -- if the public goods purchased by the high taxes far surpass the quality, quantity and impact of those available to people who live in states with low taxes.

Today's public benefits fail that test, as urban scholar Joel Kotkin of and Chapman University told the Los Angeles Times in March: "Twenty years ago, you could go to Texas, where they had very low taxes, and you would see the difference between there and California. Today, you go to Texas, the roads are no worse, the public schools are not great but are better than or equal to ours, and their universities are good. The bargain between California's government and the middle class is constantly being renegotiated to the disadvantage of the middle class."

These judgments are not based on drive-by sociology. According to a report issued earlier this year by the consulting firm McKinsey & Co., Texas students "are, on average, one to two years of learning ahead of California students of the same age," even though per-pupil expenditures on public school students are 12% higher in California. The details of the Census Bureau data show that Texas not only spends its citizens' dollars more effectively than California but emphasizes priorities that are more broadly beneficial. Per capita spending on transportation was 5.9% lower in California, and highway expenditures in particular were 9.5% lower, a discovery both plausible and infuriating to any Los Angeles commuter losing the will to live while sitting in yet another freeway traffic jam.

In what respects, then, does California "excel"? California's state and local government employees were the best compensated in America, according to the Census Bureau data for 2006.
There's a day of reckoning coming for public sector workers in California, that is, unless they get the housing bubble inflated again - that seems to solve many problems ... temporarily.

If not, things are going to be pretty grim for the state's budget for some time to come.

I don't recall where this was, but a recent news report said that the total budget deficit for all fifty states in the new fiscal year is expected to be in the hundreds of billions of dollars.

The stimulus money from Washington that helped balance many state budgets this year appears to have only pushed the problem back a year.

Bookmark and Share


Anonymous said...

You say "appears" ... I know the stimulus just pushed the hard budget decisions off a year. I wonder what states will do when the federal government doesn't come with pills of money to bail them out.

Pretty soon the feds will need to be bailed out. Printing money like we are playing monopoly certainly doesn't work forever.

Anonymous said...

Just enjoy the sunshine!!

Anonymous said...

Wait why do you think they moved for lower taxes. They probably moved for lower housing prices. Pretending taxes are even a drop into the bucket compared to that type of major expense is pretty silly.

tech98 said...

I'm not sure how much lower-tax Texas is when you add in their much higher (3.5% where I lived) property taxes. Maybe it isn't counted because it's a local payment instead of state.

I certainly noticed the paucity and poor quality of public services when I lived in TX. Not to mention other detrimental factors like the raging sh*t-fit by parents at the local high school demanding the teaching of creationism.

Dan said...

I actually considered moving to TX from Los Angeles. Hmmm... maybe I should reconsider. Higher median income, much lower housing... seems like a no-brainer... still considering though... I love the beach.

Anonymous said...

Texas is still cheaper. A $200,000 house, taxed at 4% a year,in Texas, is $8,000 in property tax.
A comperable $800,000. house,in CA. taxed at 1.5%, is $12, annual property tax.
And of course, no 10% personal income tax. If you make $60,000 a year, that is about a $4,000. net savings.
The decision to move is mostly one of age.
If you are age 20 to 40, want to buy a decent house, raise your kids with decent values, and live in a low crime area, Texas is the logical choice.
If you are 55 to 70, already own your house(paid off, presumably), then spending your final decade or two in California makes sense.

The Real Deal said...

Both models, high T/B and low T/B, can work with effectiveness and sustainability. As long as people sticks to their model. The trouble comes when people don't.

CA started off with low T/B and for a few decades sustained the Golden state as tremendous creator of wealth. Then people got greedy on both fronts. Later immigrants and migrants wanted ever more public benefits without the means to pay higher tax. Those who got rich from the low T/B regime wanted to keep ever more for themselves and less for the public.

Add the two together and you blow up the state.

Tim said...

How about this for smoke and mirrors?

State's tax withholding bump-up starts today

Last Modified: Sunday, Nov. 1, 2009 - 9:26 am

Some call it California's cash advance.

Effective today, the amount of state income taxes withheld from California workers' paychecks will increase 10 percent.

That might sound like a tax increase, but state officials insist that's not the case.

Tax experts agree, saying this bump up in withholding taxes gives the state some wiggle room in managing California's treasury in a year that saw a titanic political battle to get a handle on the state's budget.

The increased withholding comes on top of a 0.25 percent state income tax increase and a reduction in the dependent credit, also enacted as part of the state budget.

Essentially, the accelerated withholding program does not generate additional tax revenue. Instead, it front-loads it, bringing cash in more quickly in an effort to keep the state treasury stocked with funds, which is where the "cash advance" tag comes in.

State officials have estimated that the move will generate an additional $1.7 billion in the current fiscal year.

Marie Everington said...

texas tax rates are highly regional and thus vary quite a bit. that said, mostly they are more like 1-2% rather than 4%. the austin area, for example, clusters around 2-2.5%.

so even property tax is significantly cheaper.

also there are a lot of private foundations and charities in texas supplying benefits, rather than as many explicit government programs.

  © Blogger template Newspaper by 2008

Back to TOP