The Worst Kind of Taxes: California Issues Long-Term Bonds to Avoid Raising Taxes

It is always interesting to read the ballot in California when there are a dozen or more citizen’s initiatives. Californians, despite being social liberals, still tend to vote against any new taxes of any sort. During the internet boom and the housing boom there was so much revenue flowing into the state and local governments it didn’t matter – Californians had the best of everything. But as California’s economy, along with the rest of the nation, returns to sustainable rates of economic growth, something’s got to give. California’s state and local governments will either dramatically cut spending, or they will dramatically raise taxes.

Muddling the issue is the issuance of long-term bonds, which is one way policymakers avoid the need to explicitly raise taxes. But bonds are taxes – and they’re the worst kind of taxes – they borrow from the future to pay for current investments. The way governments at the state and local level have justified issuance of bonds is by claiming they are using the money to build or repair infrastructure, something that will have a benefit that lasts as long as the bond is being repaid. The problem with this is if these government entities weren’t overspending on current operations, they wouldn’t have deficits, which means they could build infrastructure without issuing bonds.

On California’s ballot this election are two major bond proposals. Proposition 1A, for a staggering $9.95 billion, is to build a high-speed railway network in California. The other big one is Proposition 10, authorizing another $5.0 billion to “help consumers purchase alternative fuel vehicles, etc.” Two others, Proposition 3 and Proposition 12 authorize a total of about another $2.0 billion in new bond issuances. So how much will nearly $17 billion in new bonds cost the taxpayers each year?

Eurostar and Thalys PBA TGVs side-by-side in the Paris-Gare du Nord.
When you are stuck in traffic, driving your zero-pollution automobile,
remember we could have widened the roads with all that money.
(Photo: Wikipedia)

If you read the fiscal impact statements for these propositions, it appears the analysts agree the cost of servicing these bonds will be 5% per year. It is relevant to mention CALPERS and CALSTRS won’t be purchasing any bonds at a fixed rate of 5%, given they have been claiming for years their funds can earn 5% or more (sometimes much more) annually, after inflation. At 5% per year, issuing another $17 billion in long-term bonds is going to cost California taxpayers another $1.1 billion per year – meaning at 10 million households, every household in California will be paying another $110 per year. And how many of us will gladly pay these taxes, and pay the fare, to ride that bullet train? How many of us will get one of those “alternative fuel vehicles” that lasts for 5 years, but costs the taxpayer for 30 years?

When considering whether or not to add another $17 billion in new bonds to California’s state government debt, note California’s state government is already servicing about $58 billion in debt, which means California’s state government debt is already costing taxpayers – at 30 years, 5% – $3.5 billion per year, or about $350 per household. Excellent information on the growth of California’s state government debt can be found in the post “California’s Exploding Debt,” recently published on the excellent website GeldPress. It is probably not unreasonable to estimate California’s city and county governments already owe at least an equal sum – meaning debt service, nothing but interest payments on bonds, currently cost each California household about $700 per year, and there is no end in sight.

Ronald Reagan once said “businesses don’t pay taxes, because businesses have to pass their costs onto consumers in order to stay in business. When governments raise taxes, YOU pay taxes.” If only Reagan were alive today to remind us. This fallacy, that if businesses are forced to pay, the consumer avoids being victimized financially, is false to its core. Demonization of corporations is the currency of politicians today, especially in California, and while it sounds good and garners votes in elections, it is pure hogwash. If business costs go up, whatever that business sells must also go up in price.

If Californians were being asked to pay for water projects, or desalination plants, or more nuclear power plants, or more freeways, or even some fast intercity rail using existing track, it might be worth it to issue 30 year bonds, because these projects would lower costs for water and energy for all consumers, and unclog our roads. But instead we are being asked to authorize bonds for a high speed rail network that will serve a relative handful of people, and for “alternative fuel cars” that will wear out decades before the bond is paid off.

And before any new taxes, or bonds, or fees, are imposed on Californians – who endure the highest taxes of any state in the USA – California’s state and local governments need to undergo drastic reforms. Currently California’s state and local public “servants” are the most highly compensated public employees in the United States, making far more on average than the private sector workers whose taxes support them. But this inordinate annual compensation package isn’t enough – California’s state and local public servants also enjoy defined benefit retirement packages that are anywhere from twice as good to ten times better than what the rest of us will get from social security, and they retire on average ten years earlier than private sector workers.

For years, California’s public employee pension funds have overestimated the annual returns they can earn, and they have underestimated the average lifespan of the beneficiaries they will pay. Read Pension Tsunami for daily links to stories around the nation covering this unfolding financial catastrophe. And even with annual funding requirements set far lower than necessary because of unrealistic assumptions, payments to public employee pension funds have been a crippling liability to the state and local governments in California. The reason this travesty hasn’t been brought to light is because public employee unions, using taxpayer’s money (via usually mandatory union dues), have virtually taken over California’s state and local governments. To-date, they have never been seriously challenged.

Recognition that bonds are taxes may help bring about reform of state and local governments in California and around the United States, but it cannot happen too soon. Already in some local jurisdictions, bonds are being authorized to raise cash for ongoing payments on pension fund obligations for public employees. This is shocking fiscal irresponsibility. Hopefully if Barrack Obama is elected President, he will have the courage to spread taxpayer wealth around, and therefore throw all of our public servants onto social security with the rest of us. If anything, that is a slightly leftist, and very equitable notion.

5 Responses to “The Worst Kind of Taxes: California Issues Long-Term Bonds to Avoid Raising Taxes”
  1. Spokker says:

    “or even some fast intercity rail using existing track”

    Uh, this is pretty damn expensive too. The point is that our existing rail infrastructure cannot support “fast intercity rail”.

    It’s too old. It’s too congested with freight traffic. It’s too curvy, with curving sections of track that limit trains to slow speeds. There are numerous sections of single track. Signaling systems are out of date. Safety features like Positive Train Control are missing.

    Passenger and freight traffic really need to be separated.

  2. Derek says:

    It should be noted that the alternative to building a $40 billion high speed rail line (of which $9.95 billion will come from bonds) is spending $80-150 billion expanding airports and freeways to move the same number of people.

  3. Geldpress says:

    Excellent post! I’ll have to stop by more often.

    Governments always make the same mistake – spending like drunken sailors when times are good, and then spending like drunken sailors on steroids when times are bad. The time to raise taxes, cut spending, and balance budgets is when private enterprises are feeding the government coffers. Then when the next inevitable recession hits, it’s time to use those accumulated surpluses to re-stimulate private enterprises through tax cuts and new spending programs.

    California blew it. They had their chance to get their books in order during the dot com boom, but instead created countless new spending programs. Now that California is drowning in its failed policies of the past, and there are no stimulus bullets left, they are resorting to begging congress for emergency loans.

  4. Private Worker says:

    Um, bonds are not taxes. Taxes are taxes.

    The propositions in question were explicit increases to sale taxes.

    State and local government bonds are nothing more or less than a market driven method of getting a lump of money now in exchange for (the promise of) paying back a larger amount of money later – like a car loan or mortgage except secured differently. They can be paid back in a lump sum or gradually.

    Before somebody will choose to buy your bond, they want to know that you have a reasonable way to pay it back. A new tax, or a reallocation from an existing tax, are common and explicit ways to give that assurange – however usage fees like bridge tolls are also common.

    If you want bank to lend you money for a car, they may want to know that you have a source of income, like employment or stocks, from which you can reasonably pay back the loan. But that doesn’t mean that a mortages therefore “is” a job.

    What gets passed or rejected by these propositions is still fundamentally and very explicitly a tax; that’s not a secret. In some states there may be an additional needed authorization to use bonds as a way to better leverage that tax, but nobody thinks the bond IS a tax, and virtually nobody votes for or against the proposition because they do or don’t believe in the market based bond issuance approach towards leveraging taxes – they vote on the basis of the perceived costs of the tax itself and the perceived benefits (or lack thereof) of the financed results.

    The “total cost” of bonds is generally much more widely reported than the “total cost” of your house mortgage; it’s no secret either.

    Geldpress: it’s interesting that you pick on governments in regard to “spending like a drunk sailor”, in the context of voter decided propositions. Governments, and the California state government in particular, can very deservedly be criticized for many things include fiscal irresponsibility. But if we get too knee jerk about it, we lose credibility for our analysis.

    California’s budget crisis has roots in both expanding spending in good times, and in repealing taxes in good times (I think you may agree at least in part) – both without planning for the business cycles which are inherent in market economies, just a periodic droughts are part of some ecosystems. It’s very unwise to take on ongoing financial obligations that assume permanent good times. Now it’s between a rock and a hard place, with no “good” alternatives, only a choice of evils. There just isn’t 42 billion of wasteful spending to be cut, so something valuable and worthwhile will have to go.

    You are correct that Californians (not entirely like residents of a few other states) do want to have their cake and eat it too – spend lots of money on roads, education, law enforcement and prisons, environment, health care, etc without raising taxes. This is another case where the time period of the feedback loop is longer than the memories of typical voters, so too many buy into appealing fantasies. However the sellers of those fantasies are not all from the “government”, nor are they all liberals or all conservatives – or all evil villains. People who want to earmark a sales tax for their kids educations (for example) are often sincere and well meaning – but sometimes not seeing the big picture.

    People got spoiled (most recently) under Clinton – one of the longest sustained economic growth periods in recent us economic history. But even Clinton could not have sustained that, and Bush made a real mess of it. Business cycles are inherent, and being in denial about them only makes them worse.

    If you don’t pay attention to the small feedback loops, the big ones will slam you. That’s happening in many areas of our society, including California state government.

  5. Bonds issued by taxpayer funded entities ARE taxes. They are deferred taxes. People used to think that accumulating debt wasn’t the same as spending money, too. Of course bonds are taxes, the author was not trying to split hairs.


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