I've been watching the melt-down in California with great interest. In case you're not up on what's happening there, the gist of the situation is this: California wants a lot out of its government but doesn't want to pay for it.
Many people credit the Proposition 13 tax revolt with starting the trouble. In 1978, California voters passed Proposition 13 into law, not only limiting property taxes to one percent of a property's value, but limiting valuation increases to two percent per year for as long as you own your home. The practical effect of this is a huge tax disparity; The new homeowner will pay many times more in taxes what his established-for-many-years neighbor does on a house of similar value. Proposition 13 was a real boon to home owners in a highly inflationary economy. People who saw their property taxes double or even triple over a few short years were now safe from such runaway costs, but the county and municipal governments that depended on the revenue were devastated, mostly by Proposition 13's mandate that all property taxes go to the state coffers.
If it had all stopped there, though, things might be all right in the Golden State, with other sources of revenue found and services continued.
"The state was riding high during the late 1990s, projecting record revenues as far as the eye could see, and spending every penny of them-and then some. Then the "dot-com" bubble burst and the state was caught off-guard and unprepared." comments Adam Summers of the Reason Foundation in his January 26, 2009 post entitled "California's Spending Addiction".
Summers goes on to note that from 1991 to the end of 2008, the state budget ballooned from $51.4 billion to $144.5 Billion with the state facing a projected deficit of $42 billion, a figure around 80% of the 1991 budget. He also notes that in March of 2004 the voters passed a $15 billion bond, and says,
"The passage of the bond was a radical departure from typical government financing practices. General obligation bonds are usually reserved for large infrastructure projects that will benefit those that have to pay them off for years down the road. In this case the bonds were saddling future generations with debt to pay for today's day-to-day expenses. It's like using your credit card to buy groceries and pay your rent."
If all of this sounds vaguely familiar, it's because the Federal Government has been doing the same thing for a very long time. In fact, I think the situation in California (and several other states) is an indicator of things to come for the nation as a whole. The people demand more services, but less taxes, and both political parties rush to oblige. The day of reckoning is rapidly approaching; irresponsible government (largely the fault of Congress) and a lack of concern for the corporate good (that's the rest of us) are threatening the stability of the nation. If you think the current economic situation is bad, just wait five years; that's when Social Security is projected to become insolvent (spending will exceed revenue) and our national debt (at an estimated $17 trillion) will be greater than our gross domestic product.
Meanwhile, we're busy fighting over ways to increase our spending. The bridge ahead is washed out, but we're in the dining car, too busy arguing over who gets served next to notice the danger.
Runaway Train.
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