Briefing Report: A Critical Evaluation of Taxpayer-Financed Spending

Wednesday, April 28, 2010

Background

Last year, California implemented a series of tax increases that were purported to remedy the state’s budget problems. These consisted of hikes on the sales tax, vehicle license fee, and income taxes, as well as decreased tax write-offs for families with dependent children or parents, which cost taxpayers almost $12 billion annually. Despite these increases, the state is looking at another $20 billion-plus deficit for the upcoming year due to continued spending and unrealistic revenue assumptions. How responsibly is government managing your tax dollars and what are liberal politicians cooking up this year to squeeze more money out of you? This report examines how taxpayer money is spent and illustrates current Democrat attempts to hike taxes and fees.

Income taxes fund the bulk of state spending

The General Fund, which provides the lion’s share of state spending, derives 98 percent of its revenues from various tax collections. These include taxes on income, sales of goods, corporations, motor vehicles, alcohol, and tobacco, etc. By far, the largest single source of revenue into the General Fund is the Personal Income Tax (PIT), which makes up 52.5 percent, or $47 billion, of all General Fund revenues for fiscal year 2010-11. The remainder comes primarily from taxes on the sale and use of goods and property, expected to be approximately $26 billion (28.9 percent), and income taxes on corporations of about $10 billion (11.3 percent). In a nutshell, more than half of the state’s General Fund spending comes from income taxes, with about one-third from sales taxes, and the remainder from taxes on corporations. Where does this money go?

Spending Graph

Spending taxpayer money

According to the budget plan proposed by the Governor for 2010-11, approximately 43 percent will be spent on kindergarten through high school education programs; 25 percent on health and welfare programs; 14 percent on colleges; and 10 percent on prisons. The remaining 11 percent is spent for other purposes, such as the Legislature and general government activities.

At first glance, it would appear taxpayer dollars are dedicated towards worthy causes, such as educating our children and caring for the poor and elderly. While this may be true in many instances, history also shows us cases of irresponsible government squander. Take for example, the following recent cases cited by various newspapers:

  • State Wasted $13 Million on Prison Drug Program, Auditor Says (Sacramento Bee - 4/14/10)
  • Districts Spending Millions on Error-Filled Math Textbooks (Sacramento Bee – 4/1/10)
  • Employment Development Department Mismanagement Costs $53 Million (Sacramento Bee – 2/9/10)
  • City of Oakland to Pay $1.75 Million to Compensate Cops for Dressing Time (San Francisco Chronicle – 12/10/09)
  • State Wasted $8 Million on Late Fees (Los Angeles Times – 10/6/09)
  • Thousands of Retired Government Workers Receive Six-Figure Pensions (Orange County Register – 5/15/09)

And these are but a few examples from a 209-page compilation by the California Taxpayers’ Association of news reports documenting systemic waste, fraud, or mismanagement of taxpayer money.1 How much is this costing taxpayers? Would the budget deficit be as big without this negligent spending, if at all? Perhaps if government cared more about the people’s money and less about growing bureaucracies, we wouldn’t be talking about tax increases.

More taxes is not the answer

According to the Tax Foundation, California ranks 6th in the country for having the highest tax burden and when it comes to keeping and attracting businesses, our not-so-golden state is the 3rd worst because of anti-jobs taxes.

For some policymakers, the way to fix a problem, like our ailing schools and deteriorating highways, is to throw more money at it. If that is the solution, then how does one explain the fact that California has the highest gasoline taxes in the country2, but ranks near bottom in highway and road construction? Or that California’s teachers are the 2nd highest paid in the nation, but our children rank among the lowest in national academic assessments?

More government spending also means higher taxes and fewer jobs. The U.S. Department of Labor cites that most mass job relocations are from one U.S. state to another rather than to an overseas location. And one of the primary reasons for that relocation is for business tax savings. The Tax Foundation reports that, “States with the best tax systems will be the most competitive in attracting new businesses and be the most effective at generating economic and employment growth”. Essentially, raising taxes will cause businesses to leave California (and keep new ones from coming), taking with them not only the jobs and investments necessary for economic growth, but also the associated tax revenues (e.g., income, sales, property tax, etc.) that fund the bulk of the state’s operations.

Yet, Democrats insist on raising taxes and killing jobs, instead of clamping down on out-of-control spending. Examples include legislation to increase taxes on combined incomes over $250,0003, a new 4.8 percent tax on fire insurance policies4, a new tax on soft drinks5, and a 10 percent tax on oil extraction that will raise gas and heating prices6. They claim that some of these tax hikes would fund various social programs. While meritorious in its intentions, is it wise to grow our $117 billion-a-year bureaucracy on the backs of the taxpayers when many more billions of dollars in government fraud and mismanagement go unchecked? Is it wise to destroy the jobs and businesses that make up the backbone of California’s economy?

Conclusion

Despite liberal myth, tax dollars do not belong to the government – they belong to the people. As officials elected to represent the people’s interests, it is imperative that policymakers take a hard look at how they’re spending the people’s money, especially with climbing unemployment and rising living costs. Tax revenues are necessary to fund a variety of critical public services. However, before more government expansion is contemplated, officials need to examine existing programs, determine how those programs may be improved, and evaluate the impact of taxes on jobs. This approach would not only make California a jobs-friendly state, it could make government programs more efficient and cost-effective. Wouldn’t that be somethin’ ?

 

1 The complete compilation, entitled “A Decade of Waste 1999-2009” can be found at the following website: www.caltax.org/waste/waste.html
2 Source: American Petroleum Institute – State Gasoline Tax Reports (updated April 2010)
3 Assembly Bill 1836, by Assembly member W. Furutani representing Long Beach
4 Senate Bill 1258, by Senator C. Kehoe representing San Diego
5 Senate Bill 1210, by Senator by D. Florez representing Fresno
6 Assembly Bill 1604, by Assembly member P. Nava representing Santa Barbara

 

For more information on this report or other Revenue and Taxation issues, contact Therese Twomey, Senate Republican Office of Policy at 916/651-1501.