Schwarzenegger Proposes Sales Tax Increase and Employee Furlough
The Issue: California Governor Arnold Schwarzenegger announced his pan to deal with the now projected to be almost $12 Billion budget gap that exists in the current operating budget for the state. His plan includes a sales tax increase and a furlough that would require all state employees to take 1 day a month off without leave for the next year and a half.
The State of Caifornia passed their budget 85 days after the June 1 deadline, a record delay. With the pressure put on lawmakers to get a budget on the books, the budget passed required borrowing from future expected revenue including tax collections and lottery income. Since then, the world economy has seen major deflation due to the sub prime loan market and Caifornia’s revenue is currently almost $12 Billion less than the approved budget predicted (about 11% lower).
Governor Arnold Schwarzenegger has called the California Legislature back to the Capitol in Sacramento to attempt to approve a budget amendment before the end of the current term in November (realisitically they would need to finish before Thanksgiving). Now the Governor has unveiled his pan to close the $12 billion gap: A sales tax increase and an employee furlough.
Schwarzenegger sent a letter to the California state employees explaining the request and asking for their support. View the letter here. The letter requests that they support taking 1 day off each month without pay for the next 19 months.
From the letter:
“If approved by the Legislature these spending reductions will impact our state workers. Californians rely on you to deliver important services every day, and I am proud of your hard work and dedication to the state. That’s why I want you to hear about these impacts from me directly”
Analysis: A sales tax increase will reduce consumer spending
This sales tax increase is the same thing the Governor said during the last legislative session. I would be surprised to see the GOP lawmakers change their tune now. Plus, a sales tax will mostly reduce consumer spending in industries that consumers deem discretionary and will not lead to greater revenues, at least not much greater. California needs to create jobs from the private sector to boost the economy. The only way to do that is to create incentives for lenders and the wealthy to invest in industry. Those investments will lead to greater income tax revenues from the jobs created.
Arnold’s proposal regarding the worker furlough is thinking outside the box. But what his furough proposal does is disguise a 5% decrease in state employee pay by giving them less days of work. Some of our public worker unions have been the catalyst for major spending increases in the past that have led us to this budget gap. Many workers for the California Government make much more than their counterparts in the private sector (where comparable jobs exist). It’s a shame that we couldn’t just decrease their pay because now the state’s output of services, which is already low, will be further reduced.
While I agree with your analysis regarding tax incentives to spur business which will create jobs and ultimately increase consumer spending, I whole heartedly disagree with your position on pay cuts / furloughs for state employees as a means of addressing the budget deficit.
You note that “many workers for the California Government make much more than their counterparts in the private sector (where comparable jobs exist)” however this couldn’t be farther from the truth. In most of the non-skilled state jobs, those employees do enjoy a small increase in pay over their private sector counterparts, amounting to roughly 10%. It’s the semi skilled, skilled and professional level jobs where the general public salary gains parity and most time exceeds what state employees earn. For instance, the Chief Physician and Surgeon of a correctional facility makes 256000 per year. A resident Physician at most major hospitals makes upwards of $400000. This can be confirmed with a quick visit to the California SPB website. I found, by talking to other people employed by the state of California, that one of the major factors in pursuing and obtaining state employment was job security. People felt safe with the knowledge that the likelihood of termination was remote provided you were tenured. However within the last 10 years that reason has been losing it’s standing with IOU’s issued by the state, poor contract negotiations and now furloughs and potential layoffs.
As a state employee myself, taking a 9% net cut in pay will amount to NO discretionary spending for me or my family. In fact, I’ll have to change tax exemptions withholdings just to ensure I don’t go in the “red” myself. Further, since this state worker furlough is only part of large stimulus package to include increased and newly generated sales taxes as well as decreased state services, I have to endure the cost of these programs too.
I understand the precarious situation we are in, however putting a large bulk of the burden on state employee shoulders is not the way to solve it. If decreased state services and increased taxes are to be used in concert with better fiscal management to solve this problem, then the burden should be spread equitably among the entire population of California, not just its workers.
Despite opposition from everyone from animal lovers to golfers, Gov. Arnold Schwarzenegger’s proposal to expand the state’s sales tax to cover a number of services is a sound idea. The tax increase is expected to raise $8 billion dollars a year.