California’s Tax Increases Haven’t Translated Into Service Increases

Proposals to increase federal taxes are very much in the national news lately. Some of the proposals are designed to expand programs but many are about income or wealth redistribution. In contrast, tax increases at the state level of government are usually about expanding programs or addressing deficits. That’s because states provide ~90 percent of domestic government services and have balanced budget requirements while the federal government provides few services and isn’t required to balance its budget.

California has recent experience with tax increases, enacting a temporary tax increase in 2012 that lifted its top income tax rate to 13.3 percent and extending that tax increase in 2016 until 2030. State General Fund revenues rose accordingly, enhanced by capital gains from bull markets:

Half of California’s General Fund spending goes to the two largest services provided by the state: K-12 education and Medi-Cal, the state’s Medicaid program. K-12 serves 5.9 million students and will receive $100 billion this current budget year, 60 percent from the General Fund, 32 percent from local property and parcel taxes, and eight percent from the federal government. Governed by the Education Code, which is under the control of the legislature and governor, K-12’s services are largely provided by government employees.

Medi-Cal provides health care services to 13.2 million low-income residents and in the current budget year will receive $99 billion, 21 percent from the General Fund and the balance from the federal government. Largely a voucher system in which beneficiaries choose among providers paid by the government, Medi-Cal is governed by federal rules but states may experiment subject to federal approval. Medi-Cal’s growth in the chart below is significantly due to the state’s expansion of Medicaid as a result of the Affordable Care Act (ACA), which grew caseloads 75 percent and for now is largely funded by the federal government.

Given the dramatic increase in spending on K-12 (up 57 percent since the year before the tax increase) and Medi-Cal (up 127 percent), one would expect dramatic improvements in customer service and outcomes. But that is not the case. A tiny share of the increased revenue made it to increased teacher staffing and salaries, only half of K-12 students meet or exceed reading and writing standards, just 39 percent meet or exceed math standards, emergency room visits are up, Medi-Cal appointments are often difficult to get, and a recent study from Stanford concludes that California’s Medicaid expansion produced a substantial increase in hospital revenue and profitability without significant improvements in patient health.

The large revenue increases provided K-12 and Medi-Cal would be the envy of many private sector enterprises but those private-sector enterprises would not receive such revenue increases if they provided such little benefit to their customers. In my experience, not a single California legislator says they are proud of the services being provided by the two big enterprises over which they have dominion. That’s why the state legislature must make K-12 and Medi-Cal work better for their customers. The key is liberation.

In the case of K-12, liberation means local control. As if coined by George Orwell, currently the state has a “Local Control Funding Formula” that in reality provides little local control. Legislators should liberate local school districts to build the best teams for kids and to capture billions being diverted from classrooms to special interests. In particular, they should (i) allow school boards to dismiss under-performing teachers and to reward teachers based on performance, the subjects they teach, and for teaching in high need schools, (ii) stop offering permanent employment (tenure) after just 18 months, (iii) end the practice of determining layoffs by seniority (LIFO), (iv) permit schools to reduce spending on pensions, and (v) discourage districts from diverting money from active teachers in order to finance health insurance subsidies for retirees.

In the case of Medi-Cal, legislators should liberate more medical professionals to provide services, reward excellent performance, punish poor performance, and intervene before costly medical treatment is required. In particular, they should (i) expand the scope of practice permitted nurse-practitioners and nurse-midwives, (ii) make fire stations and other public locations widely available for some healthcare services, (iii) reward providers that perform well or encourage treatment in lower-cost locations, (iv) penalize providers that perform poorly or overuse expensive treatments, and (v) use machine learning algorithms to intervene before costly medical treatment is needed.

All that’s needed is just 41 votes in the Assembly and 21 in the Senate, plus signature by the governor.

For a progressive state California is sadly regressive with its own state-run enterprises. Some legislators regularly criticize private sector enterprises while the enterprises under their own control — and which serve more customers than any other enterprises in the state — are providing unsatisfactory services. Dramatic increases in tax revenues should dramatically improve services but that doesn’t happen when additional revenue is poured into ineffective systems. Legislators should liberate school districts and medical professionals to provide excellent K-12 and Medi-Cal services.

Originally appeared on Medium, 2/27/19.