The Breakdown

Explaining Southern California's economy

Alert! California will be broke in a month!

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Thanks to ZeroHedge for providing the grouchy heads-up on this story from the Sacramento Bee. The state needs to find $3.3 billion and find it fast. Or it will run out of money in March. Here's ZH:

If anyone is tired of the daily European soap opera with surrealistic tragicomic overtones, they can simply shift their gaze to the 8th largest economy in the world: the insolvent state of California, whose controller just told legislators has just over a month worth of cash left. From the Sacramento Bee: "California will run out of cash by early March if the state does not take swift action to find $3.3 billion through payment delays and borrowing, according to a letter state Controller John Chiang sent to state lawmakers today. The announcement is surprising since lawmakers previously believed the state had enough cash to last through the fiscal year that ends in June."

This is an impressive burn rate we have here in California — even more impressive because most of it is based on paying off/rolling over/issuing debt. 

So where does it all go? Well, we spend the majority of the budget on K-12 education and health and social services: about $62 billion, or almost 70 percent. Makes you think that both those spending categories must, must, must be slashed!

Well, actually, no. According to this nifty (but I think somewhat dated) budget-deficit calculator from the LA Times, most of the deficit could be eliminated by raising taxes not on income but on three core areas of consumption: gas, alcohol, and tobacco. In fact, a hefty gas tax would get us most of the way there. Use a modest gas tax and add in a few more taxes, on income and on corporations while slightly reducing per-pupil K-12 spending and you get a surplus.

OK, so going after consumption only would disproportionately affect the poor, but mainly on the gas front. Alcohol and tobacco are substances that Americans and Californians have shown that they can't live without, even if one or both is killing them. We are unlikely to legislate these "vices" out of existence, so why not tax them to pay for schools and health services — the things that make us smart and, you know, healthy?

So as you can see, there's really no reason for us to run out of money next month at all. Have a drink, light a smoke, and fix the problem while you're at it!

Follow Matthew DeBord and the DeBord Report on Twitter.

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