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.
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.