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A Clever Way to Preserve Services While Cutting the Budget

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A Clever Way to Preserve Services While Cutting the Budget

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Students study outside their classes on the University of California at Irvine campus.

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Darien Shanske, a professor at the University of California Hastings law school, offers a thoughtful new approach to the California state budget in this paper at the California Journal of Politics and Policy.

His argument is complex, as anything involving the budget must be. But it boils down to this: Shanske wants policymakers to budget using “the benefit principle."

In other words, those who benefit from a particular action of government should bear the costs of paying for it.

To illustrate what he's arguing, Shanske points to the $11.4 billion general obligation water bond that's due to appear on next year's state ballot. That bond would make all sorts of updates for California's water infrastructure -- and because it's a general obligation bond, all of us would pay for it. This is a political weakness, since landowners with land near strengthened levies, and other direct beneficiaries, get the most value for the water improvements.

Shanske's answer: Those beneficiaries of the water bond should pay most of the costs.

Instead, he writes, "I think that the state has made a mistake in opting to use the expenditure of general income and sales taxes to fund specific improvements that in many cases can fund themselves."

Shanske has a clever and provocative idea for how to get people to pay for this. While beneficiaries would be assessed for the government they benefit from -- Shanske also proposes allowing the beneficiaries to deduct what they pay for the benefit from their state income taxes. A few examples from Shanske: "There can be tax credits for fees paid in connection with carbon mitigation, for tuition paid to California institutions of higher learning, and for taxes paid to local government entities. A new local tax credit could be a spur for realignment and is consistent with the benefit principle to the extent that many local taxes, especially for schools, can be rightfully viewed as benefit taxes (at least in large part)."

Why would this be worth the trouble? Shanske provides a mathematical example: "There are approximately 150,000 California resident undergraduates in the UC system.62 Let us propose a California education credit along the lines of the current federal Lifetime Learning Credit.63 This (nonrefundable) credit is worth up to $2,000... At the maximum, such a credit would cost the California General Fund $300 million (150,000 x $2,000). There are two big reasons why this would not cost the General Fund this much. First, the $300 million credit will be paired with a $300 million spending cut, so at worst the credit will be a wash for the General Fund."

And, he adds, if the credit was phased out for people above a certain income level, the state could save money in the budget through this method.

In short, this approach is: cut the budget by replacing direct state support with a system that requires beneficiaries of government spending to pay most of the costs, and gives the people who need it their money back via tax credits.

The best part is political: this can be done without a 2/3 vote of the legislature, so Democrats can enact it themselves.

Shanske concludes by making the provocative argument: that this is what voters want. Polling suggests voters think the state should have all kinds of services, but they only want to pay for certain ones (presumably the ones they use). One explanation for this is voter confusion, or voter selfishness. Shanske argues that they want a system where the people who benefit from a program pay its costs.

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