California’s legislative leaders are proposing a $100 billion “economic stimulus plan” financed by massive new borrowing. What could possibly go wrong?
When legislators passed and Gov. Gavin Newsom signed a 2020-21 state budget in June, they described it as “balanced.”
Not by a long shot.
As detailed in this space earlier, it included at least $20 billion in direct and indirect, on-the-books and off-the-books borrowing that must, of course, eventually be repaid. More than half of the new debt is in “deferrals” of state aid to local school systems that, by constitutional law, must be restored in future years.
Having emulated the federal government by financing current spending with longer-term borrowing, legislative leaders now want to dive into the deep end of the debt pool with a $100 billion “economic stimulus plan.”
It’s a laundry list of public works and direct payments to Californians and businesses affected by the pandemic-induced recession, financed by “new revenues without raising taxes.”
“Millions of Californians are suffering in this economic downturn, and Republicans in Washington, D.C., don’t seem to care,” Assembly Speaker Anthony Rendon said in a statement as an outline of the plan was released on Monday. “Assembly and Senate Democrats are advancing innovative proposals to help people and small businesses.”
Some of the new benefits and projects would be financed by borrowing against existing revenue streams, such as speeding up highway projects by pledging future gas tax and motor vehicle fee proceeds. That at least makes some fiscal sense.
But while details are scant, it appears that the big money would come from authorizing the state treasurer “to issue future tax vouchers to generate billions of revenues for general economic stimulus efforts outlined in the plan.”
In other words, corporations, and perhaps high-income individual taxpayers, would be induced to make payments of future income taxes in return for certificates that could be used to pay those taxes when they are due — with, it’s assumed, direct or indirect interest payments to those who participate.
It’s similar in concept to the budget’s creating a big chunk of indirect debt by suspending some corporate tax breaks to generate $4.5 billion for the budget while allowing affected businesses to claim the tax credits in the future.
Unless extended by Newsom, the legislative session is due to end in a month, which leaves little time to fine-tune such a huge scheme. And we don’t know whether Newsom is on board, even conceptually, although he’s fond of “big, hairy, audicious goals.”
“I would be remiss to comment until I have a chance to review the details,” Newsom said at a news conference. “We have to include a framework of bringing people along as we reopen our economy.”
In part, the legislative stimulus plan seems aimed at fending off demands from the left wing of the Democratic Party for hitting corporations and wealthy Californians with new taxes to enhance recession relief programs.
Bob Schoonover of the Service Employees International Union immediately denounced the plan’s lack of new taxes, saying, “While we support many of the items listed in the Legislature’s plan, we cannot support the chicanery with which the Legislature proposes to secure them: taking from future generations without demanding that today’s billionaires and powerful corporations step up and contribute.”
Piling on debt for current spending is obviously risky, particularly since no one knows how long the pandemic and its recession will last. But raising taxes is also risky because it could spur further flights of corporations and the wealthy from California, taking jobs and tax payments with them.
This could be a defining political moment.