Business Update with Mark Lacter

Tax Hikes; pension shortfalls

KPCC's business analyst Mark Lacter talks about California Governor Jerry Brown's proposed tax hikes and how taxing the wealthiest Californians may not necessarily fix the state's budget woes.

Steve Julian: On Tuesdays we talk about the latest business stories with Mark Lacter. Mark, are tax hikes in the offing for California?

Mark Lacter: It all depends on the voters Steve - next November they'll probably be looking at one or more ballot measures that would call for various combinations of tax increases to help bring down this monster deficit. So far, Gov. Jerry Brown's proposal is getting most of the attention - it would boost the state sales tax, as well as boost the personal income tax (though only for the wealthiest households). Brown would have the money go towards education, which of course has taken huge hits.

Julian: I know several other groups are pushing for their own ballot measures...

Lacter:...most of them focused on higher taxes for rich people or for businesses. Now, there's no question that the state needs to raise revenues - next year alone the deficit is running $13 billion and you can't make all of that up by continuing to cut services. Well, you can, but you won't have much of a state government left. The problem is arriving at a combination of budget cuts and tax increases that enough people can agree on. Gov. Brown tried to reach out to Republicans in the state legislature earlier this year, but he got nowhere - and they had just enough votes to obstruct efforts at raising taxes. Brown might have better success through a voter initiative, especially since it will be on the November ballot when Californians will be selecting a president and the turnout in a presidential year is likely to be much higher and broader based than during an off-year election.

Julian: But asking voters to raise taxes is tricky, no matter what the circumstances...

Lacter: Well, that's right because the easiest way of getting it done - asking the very wealthy to pay more - isn't necessarily the best way. The state has an extremely progressive personal income tax, which means that folks at the top of the income ladder pay the most and everyone else either pays a much smaller amount or nothing at all. If they really wanted to reform the tax system, rates would be adjusted so that everyone except the lowest-income groups would have a little skin in the game. But politically, that's an impossible position, so instead the governor is crafting a measure that provides the least pain to the maximum number of voters. And even that may not work. When voters are confused by initiatives, the reflex is to vote against everything, which would almost certainly guarantee another series of large budget cuts.

Julian: What about pension shortfalls? Do they doom the state - even with a tax hike?

Lacter: Quite possibly, especially if you believe a new and quite controversial study by a Stanford University professor who says that the state's pension shortfalls are getting a lot worse. Just not enough pension money coming in and more state and local employees are reaching retirement age, which means that the pension obligations are only going to get larger. To give you an example, Calpers - that's the giant state pension fund - is only covered for three out of four dollars that it owes. If it were a private pension, Calpers would be required to freeze benefits. Actually, that was one of the recommendations made by the Little Hoover Commission: freeze the benefits earned by current workers and cut benefits for future years worked.

Julian: And the chances of this happening?

Lacter: Well, there is virtually no chance of this happening, for both political and legal reasons. The
employees unions are simply too powerful, and besides, these governments made a commitment to their workers to provide a certain level of retirement benefits - and if there were any pullback in those promises, you can be sure that the unions would fight it in the courts. But without real reforms in the pension system - and we're talking painful reforms - pension obligations are going to keep crowding out state spending for stuff like schools and social services. As with taxes, a lot of this really comes down to personal sacrifice. We can't have it all - everybody realizes that in the abstract. But when does it get real?

Julian: Mark Lacter is a contributing writer for Los Angeles Magazine and writes the business blog at LA Observed.com.


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