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Untangling the California budget nightmare

The budget mess in California has readers in that state wondering: So just where does my tax money go, anyway? Unraveling that question helps explain why the Golden State's financial problem has so far defied a solution.

I know in California many services are paid for out of the general fund, but where do specific taxes go such as my property taxes, my gasoline taxes, my local sales taxes, etc.

I keep hearing about the services I'm at risk of losing due to the financial crisis, but I'm still paying all the above taxes, so I want to know what they are going toward. Can you help me?
— Kevin H., Newbury Park, Calif.

We’ll try. In a 1,000-word column, we can only scratch the surface. But before we get started, have a good laugh and check out this showing how the budget process works in California.

OK, let’s start with the easy part. If you take all of the revenues that California collects through a variety of sources (more on that in a minute) and then lump them all together, the money last year was spent roughly like this:

The biggest item in the budget — roughly half the general fund — goes to pay for education. About $35 billion goes for K-12 and another $12 billion for higher education. (On a per capita basis, that’s just about average for the 50 states, according to census data.)

The next biggest chunk, about $31 billion, pays for various health and human services programs, the biggest of which is Medicaid. It cost about $10 billion to keep the prisons running last year and about $3.8 billion to pay for the three branches of state government: the governor's office, the legislature and the courts. Other services like environmental protection, labor, transportation and housing programs are all rolled up into another $4 billion or so.

All of this is paid for with a collection of taxes and fees that all go into one big pot called the general fund. The bulk of that, nearly $47 billion, comes from income taxes. (California is sixth highest per capita, according to the Tax Foundation.) The next biggest source of funds is the sales tax — at 8.25 percent, one of the highest in the country — which generated $28 billion last year. Corporations pay $10 billion, and the rest comes from a variety of other sources, including taxes on cigarettes and liquor, gasoline, motor vehicle fees, oil production, etc.

But that $91 billion just represents the general fund — the money that pays for programs proposed by the governor and approved (or not) by the legislature. Like most states, California also has a list of separate “special funds” that are paid for through a variety of dedicated taxes and fees.

By our count, there are more than 400 of these things — from the Abandoned Watercraft Abatement Fund to the Wine Safety Fund — which siphon up another $26 billion. You can check out the full list of those special funds .

In theory, these funds are supposed to be “lock boxes” — dedicated programs that are walled off from the general fund so they won’t be cut. In some cases, they were mandated by referenda when voters decided to guarantee themselves a particular program or service they didn’t want the legislature to take away from them. In practice, though, the legislature has gotten skillful at raiding some of these programs to make up for budget shortfalls elsewhere.

With so much of its budget paid for with income and sales taxes, the shortfall in California has been severe. With an state unemployment rate at 11.5 percent, all of those people out of a job won’t be paying income taxes. And with consumers tightening their belts, sales tax revenues have dried up rapidly. It’s hard to cut services that quickly without inflicting some serious pain on the voters.

But the Golden State’s penchant for managing state finances through a hodgepodge of referenda has made an even bigger mess of the budget. One of the biggest roadblocks at the moment, for example, is something called Proposition 98, a constitutional amendment approved by voters two decades ago that prevents the government from cutting funding for schools and community colleges below a certain level. With Proposition 13, however, voters in 1978 capped the amount local governments could charge in property taxes, which is by far the biggest source of funding for public schools in most states.

So it’s not hard to see why California is having such a tough time balancing the books. Not only is the government spending beyond its means, it’s required to do so by a state constitution created by voters at the referendum ballot box.

(You recently wrote) "the IRS will continue to require that (California) employers withhold taxes from most workers’ paychecks. So the (state-issued) IOUs can’t be used to offset that federal tax liability."

I challenge you to show me anywhere in the IRS documents that would state the term 'liability' as it applies to these workers. You will not find it. Do yourself a big favor and stop using words that mislead the masses.
— Salah

The word comes from me, not the IRS.

A "liability" is something you owe or some other obligation or potential future expense or claim.

Based on established laws that a handful of tax cranks choose to ignore, most people owe taxes on income — unless they earn too little or have enough offsetting deductions or credits. All of which is clearly spelled out in laws that have been upheld by the courts for decades.

Nonetheless, there are a surprisingly large number of readers (not all of them from California) who seem to believe that government could continue to provide all the services they want and need — even if we all stopped paying our taxes.

It doesn’t work that way. People who “volunteer” for military service, for example, still expect to get paid. If you believe government should provide fewer services, by all means vote for representatives who believe in smaller government.

But you can’t just decide to stop paying your taxes. All that does is raise taxes on the rest of us.