California Budget Challenge

Budget Basics

What's Missing?

Users may wonder why certain programs or issues are not included as policy options in the Challenge or don't result in an impact on the budget totals.  Here are a couple of examples of those items.

School Funding Formula – The allocation of funding to school districts throughout California is governed by numerous laws in the state Education Code. In the 2013-14 budget, the Governor proposed to significantly revise the allocation formulas that determine how much each school district receives. The budget proposed a new "Local Control Funding Formula" that provides funding to schools through combination of a base amount per student and a supplemental amount based on a school's proportion of English language learner and free and reduced‑price meal eligible students. The Governor argued that new funding formula will increase local control, reduce state bureaucracy, and ensure that student needs drive the allocation of resources. The Legislature adopted the Governor's proposal with changes in the budget. The debate over the best way to allocate funding to schools is an important one for the state's future. However, because the discussion involves how funds are allocated rather than the total amount that is allocated (which affects the overall condition of the budget), we haven't included this issue among the policy options users can consider.

Dynamic Versus Static Estimates of Tax Changes – Over the last 15 years, some offices responsible for estimating the impact of tax cuts (such as the Congressional Budget Office) have attempted to make these estimates "dynamic" rather than "static." Dynamic estimates attempt to take into account predicted changes in the overall economy caused by tax changes as well as changes in the behavior of individual taxpayers. Static estimates often take the behavioral changes on the part of individual taxpayers into account, though sometimes only to a limited extent. Thus, a static estimate of revenues resulting from, for example, an increase in cigarette taxes would take into account how many fewer cigarettes would likely be purchased as a result of the tax increase. In contrast, a dynamic estimate of, for example, a reduction in income taxes, would attempt to account for the estimated increase in economic activity generally resulting from the tax reduction, as well as changes in behavior on the part of individual taxpayers. Thus, a dynamic estimate of the revenue loss resulting from a tax cut would attempt to estimate any offsetting increase in tax revenue that would result from additional economic activity resulting from the tax cut.

However, economists disagree about how best to model long-run economic growth and the effect of taxes on the economy, making dynamic revenue estimating more of an art than a science. In a 2008 paper prepared for the Harvard Law School Federal Budget Policy Seminar, Adam Fletcher and Trenton Hamilton stated, "Proponents of dynamic scoring believe that current revenue estimates overstate the revenue losses of tax cuts because they fail to measure the increased growth that the tax cuts would spur. This view is based on the supply-side economics theory that tax reductions will significantly stimulate savings and investment, and increase labor supply. While it is widely accepted that tax cuts do generally have positive effects on growth, opponents of dynamic scoring believe that the macroeconomics effects cannot be predicted with enough certainty to be included in revenue estimates, and that if they were, political pressure to overestimate them would interfere with accurate budgeting."

Undocumented Immigration - Though undocumented immigrants use some public services and pay some taxes, there are no official estimates of these costs and revenues. Various groups or researchers have tried to estimate the net impact of immigrants, but there is still a fair amount of disagreement about these figures. For this reason, we have not included specific proposals regarding the provision or elimination of services for undocumented immigrants.

High-Speed Rail - In 2008, the voters approved a nearly $10 billion General Obligation bond measure to pay a portion of the costs of high-speed rail, and the state's high-speed rail plans are a prominent topic in the news lately. However, while the status of the project will have a potentially significant impact on the budget over the long run, in the short term, it will have little impact on the condition of the state's General Fund. This is because the impact of halting the project would result in lower future-year costs for debt service to pay off the high-speed rail bonds. For this reason, the policy question about the high-speed rail project shows no short-term impact on the budget.

Unemployment Insurance - California's Unemployment Insurance (UI) program became insolvent in 2009 as a result of the fixed level of unemployment insurance taxes and rising UI payments, due in part to the recession. The fund deficit is approximately $8.8 billion. To continue to pay benefits, the state borrows from the federal government. However, interest payments on that borrowing must come from state funds. Long term, a balance between benefit payments and annual employer contributions will need to be achieved. The Governor's Budget states that the Administration will spend the coming year working with stakeholders to craft strategies to address this issue.

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