Sacramento Bee Misleads on Arena as Tax

On his City Beat blog, Ryan Lillis, city hall reporter for the Sacramento Bee writes that opponents of a subsidy for the NBA Kings arena in the city are misleading voters when they say that it means higher taxes. In fact, the opponents are more right than Lillis.

It is a fundamental principle of public finance that any spending by a government that does not have its own currency must ultimately be paid for by individuals and firms — through taxes, fees, or exactions. As conservative economist Milton Friedman liked to say (in a phrase that liberal economists frequently quote), to spend is to tax.

So, too, with the proposed arena subsidy in Sacramento. The city's$346 million contribution to building the arena is a government commitment of public resources that must be repaid by the city's taxpayers. It's a tax of roughly $700 on every resident of the city.

How exactly that money will be collected is still an open question. Sacramento remains mired in the process that the New York bond analyst who writes online under the pseudonym Bond Girl describes thusly:

Officials then work with their friends in the banking community to craft some borderline-insane financing scheme that involves the city, or some puppet nonprofit established by the city, issuing a combination of tax-exempt and taxable bonds to pay for the new facility. Debt service will be paid from a combination of grossly exaggerated facility revenues and whatever other miscellaneous revenues the city manages to scrape together. (“Hey, how about parking revenues? Our parking garages will be packed once the city’s economy is rejuvenated by the presence of a professional sports team. The facility is practically paying for itself this way.”) Officials will then probably hire some economic (prostitute) consultant to reverse-engineer revenue projections that make the project seem feasible. Maybe the city decides to back the bonds directly.

Whatever "borderline-insane financing scheme" ultimately emerges, one fact will remain: any public resources devoted to the arena could otherwise be used to pay for other city services like police, fire, parks, culture, and libraries, or to reduce taxes. To spend is to tax.

What Lillis neglects to tell us is that the signature gatherer he ignorantly brands as "misleading" is doing no more than paraphrasing what the Bee's own columnist, Dan Walters, has suggested: that the higher Measure U sales tax enacted in 2012 and due to expire in 2019 will be used and extended to pick up the arena bill.

Supporters of the arena subsidy understandably don't like to talk about it as a tax. Mayor Kevin Johnson is demanding that his city, home to the poorest residents in the region, carry the entire burden for a facility that caters predominately to higher-income people. (This may explain why the strongest supporters of the subsidy live outside the city; it's easier to love a tax you don't have to pay.)

And it's even harder to talk about the arena as a tax when your city already has the highest taxes in the region. Only Galt has a sales tax as high as that in Sacramento (8.5%). The city's utility user tax rates (7.0% and 7.5%) are triple those in other parts of the region. These taxes are both highly regressive, hitting the essentials of life—heating, cooling, clothing—that make up a high percentage of the budgets of the poor. The city that's home to many of the region's poor hammers them hardest.

Vigilant and useful journalists would be explaining this to the region. Instead, as in so much of the Bee's cheerleading coverage of the arena subsidy, Lillis brands as "misleading" the very citizens who are raising the right questions about who benefits from the giveaway and what it might mean for the future of a financially and economically troubled city. He owes them an apology, and the Bee owes its customers and city better reporting and analysis.

Prop 13 as Original Sin

Give credit to David Crane. Unlike the pundits and would-be tax reformers who moan about California state government's boom-and-bust revenues, Crane, who was economic advisor to former Gov. Schwarzenegger, is brave enough to state the obvious: Prop 13 is the original sin.

Why are state revenues volatile? Because over the last 35 years California voters and policymakers cut the taxes that vary least with economic conditions, leaving governments increasingly dependent on the ones that vary the most.

The first and biggest whack, as Crane notes, was the 1978 Jarvis-Gann Prop 13, which cut and capped the property tax, a revenue source that declines only in the most dire economic moments, such as the Great Depression and the bursting of the housing bubble in the Great Recession. It was followed by the 1982 initiative eliminating state gift and inheritance tax and Schwarzenegger's 2003 cut in the vehicle license fee (which, perhaps not surprisingly, Crane fails to mention). Even more than the property tax, these were stable revenue sources, death and driving being inevitable features of the California scene.

But when they cut taxes, Californians didn't mean they wanted fewer public services. They have filled the void, partly by raising sales tax rates (since Prop 13 the combined uniform state-local rate has gone from 6% to 7.5% plus locally approved add-on levies for transportation or general city services); and partly from the rising yield of the personal income tax, which delivered more and more dollars because of the enormous shift of income to the wealthy that has taken place over the past several decades. Now, with the higher rates on the rich enacted last year in Prop 30, the yield will be even greater.

But it will also be episodic. Income tax collections swing with capital gains in the markets, and taxable sales swing with the economy (they fell 18 percent from 2007 to 2010).

As Crane argues, the right cure for this volatility would also be good for the state's economy. I think he exaggerates the risk that California's current taxes will cause the rich to flee, but he's right that our current tax balance—high taxes on work and investment, low or no taxes on property and oil—is "crazy." From an economic perspective, property taxes are, in the words of conservative economist Milton Friedman, "the least bad tax there is." If you tax land, you don't have to worry that you will cause people to produce less of it. If California imposes an oil severance tax, as every other oil-producing jurisdiction in the world does, you don't have to worry about the oil disappearing or oil prices rising, because oil prices are set by a global market, in which California tax policy is but a blip. Shifting taxes toward land, oil, and carbon and reducing them on work and investment would strengthen the economy while providing a more stable base for public services.

Crane cautions that, before changing Prop 13, "governments would first need to reduce pension and health-care liabilities." But here he has it backward. As we show in California Crackup, it was Prop 13 and the governing system it created that made the out-sized pay and pensions of local government workers possible and perhaps inevitable. Getting rid of them is the necessary condition for creating a local taxpayer counterweight to public employee power in city and county politics.

The Taxes That Didn't Bark

Was it a good thing for California that legislative Republicans stymied Gov. Jerry Brown on taxes in 2011? Robert Kleinhenz, the chief economist for the Los Angeles County Economic Development Corp., thinks so. According to the Los Angeles Times, Kleinhenz told the Sacramento Press Club that, “We were still reeling from the recession. [A tax increase] could have taken an already dire situation and made it worse.”

If Kleinhenz offered any evidence or argument to back up his opinion, the Times didn’t say. In fact, the Times didn’t even bother, for the benefit of readers, to clear up Kleinhenz’s apparent case of amnesia. The issue facing California when Jerry Brown became governor in January 2011 wasn’t whether to raise taxes. Higher taxes had already been in place in California for nearly two years: the temporary tax increases approved by the Legislature and Gov. Arnold Schwarzenegger in February 2009, at the very depth of the Great Recession. In his first budget Brown sought only to maintain the status quo by extending the level of taxes already in place.

We don’t have to speculate, then, about whether higher taxes “could have taken an already dire situation and made it worse.” California took the leap in 2009. If higher taxes were destructive, Kleinhenz might be expected to offer evidence of it in the economic performance of the state while they were in effect. That’s the kind of thing a skeptical journalist (as opposed to a stenographer) might want to check, either by looking directly at the data or interviewing an expert. The Times failed to do so.

So let’s try it here:

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Job Growth, California and nation

The graph compares the year-over-year percentage change in private nonfarm employment in California (blue line) against the nation as a whole (red line) for 2010 through 2012. California’s rate of recovery almost exactly tracks the national economy both on the left half of the graph, the period when the temporary taxes were in place, and on the right half, after they disappeared in July 2011. Raising taxes “in an already dire situation” apparently didn’t makes things worse, nor did lowering them two years into the recovery make things better. 

This is not surprising. Readers would understand this if the Times and other media would occasionally provide some numbers to give context to our political arguments. One of the great failings of public policy reporting is that journalists so rarely show readers what they mean by phrases like “higher taxes.” Brown’s initial budget proposal to extend the temporary taxes would have raised revenues by a combined $15.5 billion over the 2010-11 and 2011-12 fiscal years. What does $15.5 billion mean? Well, total personal income in the state for those two years was $3.4 trillion. The argument was about less than one-half of 1 percent of personal income. 

And the alternative to that small drag on the economy, Kleinhenz and the Times neglect to tell us, was not to avoid all drag. Unable to extend the Schwarzenegger temporary taxes, Brown and the Legislature were forced cut spending. Firing teachers and state workers created its own small drag. Some of the private-sector job gain of 632,000 in the graph above was offset by the loss of 83,000 public sector jobs. 

So was it a good thing that Jerry Brown didn’t get his way on taxes in 2011? Measured by the short-term movement of the economy, it didn’t matter much one way or the other to most Californians. But to all those young Californians who found themselves shut out of college or trying to learn math and science and English in schools with shortened years and overcrowded classrooms, it may matter a lot for the rest of their lives.

State of the Dimming Dream→

The San Francisco Chronicle asked me to write about whether California’s ongoing crisis has changed state government as we know it. My answer, in this Sunday Insight article, has been released from behind the Chron’s pay wall. Check it out.

Obsessing about taxes is bad for the future→

Over at Zócalo Public Square, I explain what makes the governor's wife scream.