Better Ways to Balance the Budget

by Will on October 20, 2010

In California, “balancing the budget” is an issue every single election. Generally, it is posited that we have two choices: fire a bunch of public employees and cut public relief, or raise a bunch of fees on, say, pet owners, or some other group of ordinary people who aren’t doing anything questionable. Lately the idea of telling teachers that their pensions are worthless also seems to be gaining popularity.

Those would be bad choices right now, tending to further contract demand/money and to increase unemployment. What are some less destructive options that would achieve a balanced budget?

*Fix the price of gas somewhere around $4, to be adjusted annually for inflation. Tax the difference between the market price and the fixed price. This makes gas more expensive, so fewer will buy cars, fewer will drive, and those who buy cars will demand fuel-efficiency. The fixed price removes the damage that fluctuations in gas price cause in other industries. A gas-tax increase is much better than an income-tax increase, because work is a good thing we want people to do, while gasoline is a poison. (I got this idea from Thomas Friedman, with whom I almost never agree).

*Sell the highways. Surely the Republicans will come around on this if it’s sold as a way to avoid raising taxes. I’ll bet those highways are worth a lot.

*Impose a high tax on unimproved land. This falls predominantly on the owners of empty lots and blight, encouraging them to develop–or sell to someone who will. This is a unique tax that does not impede productivity but actually spurs it. Indeed, it taxes inactivity, waste, and speculative holding.

*Put Chevron and other California oil companies out of business. Chevron makes a killing pulling oil out of the ground that by all rights is the common property of all Californians. In doing so, they put us at risk of suffering a horrific oil spill like the one we saw this summer in the gulf. If we are going to bear the full brunt of this risk, we should also benefit fully from the profit. There is, it is true, ample evidence that publicly run firms are less efficient than private competitive firms. The oil companies, however, are not competitive, but operate with an effective monopoly (a start-up has neither the infrastructure nor the oil necessary to compete with them). Monopolies are less efficient than competitive firms for the same reason public firms are less efficient (no incentive to reduce costs, no incentive to innovate). If we replace monopolistic Chevron with a publicly run California State Oil, it’s a wash as far as efficiency goes, and a huge source of revenue to the state. Abroad, state-run oil companies are everywhere associated with healthy (often too healthy!) state revenues.

*Revise Prop 13. There are several ways that this might be done that could win public consent. Perhaps the amendment could be made only to apply to private persons, not to ¬†incorporated entities and partnerships. This would put an end to mischievous dealings where property is transferred to a new owner without needing a reappraisal–such dealings are common–, and would also stop profiting apartment owners who over time enjoy the increasing disparity between their rising rents and the fixed tax. Alternatively, we could take a more narrow approach and simply close the loopholes that allow the mischievous transfers alluded to above, or even close them only to businesses. I get that people won’t vote to get rid of Prop 13 altogether, even though it results in absurd and unjust outcomes. But surely they’ll consider some sensible revisions that won’t affect most people.

*Eliminate deductions. At present, California’s tax law asks residents to report their post-deduction income from their federal filing. Deductions, other than for simple inventory, encourage all sorts of wasteful spending. We could stop allowing deductions in state filings and simply tax total income at a lower rate. The virtue of this change is that people — ever irrational in their reverence for numbers — would perceive a cut in rates as giving them more money, even if it resulted in a similar tax. This would bolster Californians’ spirits and make them more likely to spend and invest.

I believe that all of these proposals would generate non-trivial sums of revenue. I believe that a combination of all would be more than sufficient to balance the budget. This contrasts sharply with most proposals I hear, which involve trivial amounts of spending or revenue. Imagine, Meg, imagine, Jerry, the glory that will accrue to the governor who manages in one term to end California’s budget woes, in the middle of a slump, in a way that puts little stress on the weak economy.

{ 1 comment… read it below or add one }

Brian October 21, 2010 at 6:44 pm

You’ve listed a lot of my favorites and a few I hadn’t thought of. But dammit, who’s going to actually do it!?

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