A grand bargain: tax hike, pension fix

Sacramento Bee

When it comes to technology, innovation and the arts, California often sets the bar for the rest of the country. Unfortunately the same can’t be said about California’s fiscal governance as the state limps from deficit to deficit, diverts spending from critical services to pay off past debts, and all too often enacts budgets that penalize job creation.

But that could soon change and in so doing, California could set a powerful example for Congress and President Barack Obama.

Recently Gov. Jerry Brown rightfully proposed a change to California’s corporate tax that would boost both job prospects and state revenue. That’s right, a tax increase that would also be good for in-state jobs. In brief, the change would make the “single-sales-factor” method of corporate taxation, enacted into law in 2009, mandatory instead of elective.

Unfortunately Republican legislators have already thrown cold water on Brown’s proposal, presumably because it would violate an ideological stand against tax increases. But there’s a more productive path available to them that would be good for both budgets and jobs: demand real pension reform in exchange for the tax increase.

This year the state will devote more than 6 percent of its general fund to pension and other retirement costs, nearly double the average annual share of the budget taken up by those costs over the preceding 20 years. State retirement costs now exceed what the state spends on the University of California and California State University systems. Worse, that share of the general fund is headed sharply higher as the full costs of retirement promises, hidden by obfuscatory accounting methods, start coming due and the state steps up overdue contributions to the teachers’ pension fund. As a result, in the absence of real pension reform the revenue generated by the corporate tax increase would, over time, largely go to service increasing retirement costs.

Likewise, without pension reform and amid ever-rising retirement costs, private-sector employees and employers would and should reasonably expect pressure to grow for future tax increases on their activities in California, further dimming their enthusiasm to work and hire in the state.

Real pension reform would change all those dynamics, reduce state and local debt, allow more budget revenue to go to useful priorities such as infrastructure and higher education, and send a message to workers and companies that California is serious about addressing budget problems in ways that will boost jobs and wages. Combined with the corporate tax reform proposed by Brown, there’s a grand bargain there.

How does Washington fit into all this?

Like California, the national government is seeking to boost jobs and improve the economy while reducing deficits, debt and future expenditures. In that regard, Warren Buffett recently proposed immediately boosting taxes on the wealthiest Americans by $50 billion per year while gradually reducing national government spending to 21 percent of GDP, which would require spending reductions of more than $500 billion per year. Reductions of that magnitude will almost certainly require changes to retirement programs such as Medicare. At the same time, New York Mayor Michael Bloomberg and others have called for immediate increases in spending on infrastructure to boost long-term economic prospects and to put more people to work right now.

There’s a grand bargain there, too. Like California, the federal government has an opportunity to boost jobs, cut deficits, and reduce debt and future spending by enacting a tax increase, boosting infrastructure spending and reforming retirement programs.

Our generation owes it to future generations to stop dedicating vast amounts of government revenue to ourselves in the forms of tax cutsand entitlements and to start dedicating more of that revenue to investments that will pay dividends for others right now and down the road. With some courage, California can lead the way.