As was discussed in an earlier issue of the Digest, California is facing a serious budget crisis that many observers hoped would force the state to address some of the fundamental problems with its tax system. Last week, Governor Schwarzenegger proposed a plan he asserted would remedy the deficit problem, but that plan would do nothing to improve the state's tax system. Rather than proposing a broadening of the sales tax base, as has been discussed, the Governor would like to expand the lottery with new games, bigger prizes, and less restrictive marketing rules. The new revenues expected to be generated by these changes would be made available immediately by selling the securitized future earnings from the lottery to investors.
Attempting to fill such a huge budget hole with lottery revenues has already raised the concerns from members of the legislature and of the Legislative Analyst's Office (LAO) who fear that increasing the prominence of the lottery will disproportionately affect the poor, both through financial loss and increased social problems. Even more importantly, though, the LAO expects the Governor's plan will produce far less revenue than he has claimed. With lottery revenues this year declining to a five year low, the Governor's plan to double revenues within ten years appears overly optimistic. Legislative Analyst Elizabeth Hill believes that if revenues fall short of the Governor's estimates, public schools could lose out on as much as $5 billion over the next twelve years.
Complicating matters further is that if the Governor's proposal does not gain the approval of the voters, his back-up plan is a temporary 1 cent increase in the sales tax rate. A new survey from the Public Policy Institute of California suggests this outcome is actually very likely... 62% of likely voters oppose the lottery plan, while 57% of likely voters favor the sales tax hike. Aside from being starkly regressive, Hill estimates that the sales tax increase, which would not take effect until midway through the fiscal year, would fall $2 billion short of raising the amount needed to fill the budget gap.
Due to concerns about the huge uncertainties in the Governor's plan, Hill recommends that borrowing against future lottery earnings be significantly scaled back and combined with a temporary hike in the sales tax rate. While this proposal would be a much safer bet for California's children, it would squander an opportunity to meaningfully address the problems with the state's tax system.
A temporary hike in the sales tax rate is only a band-aid fix. California's sales tax rate is already among the highest in the nation. The real problem is that far too few purchases, including most services, are needlessly exempt from the tax. Broadening California's sales tax to include services, and eliminating other unnecessary exemptions in the tax code, could provide a boost in revenues while simultaneously enhancing the sustainability and fairness of the revenue base. Unfortunately, the Governor seems much more concerned with finding the path of least resistance than with doing the hard work involved in enacting forward-thinking policy changes.