Ben Zycher responds to Genest in Round IV.

I will jump in here to say, again, that with all of these VERY REAL concerns about the cap being expressed by a noted conservative economist, isn’t it time to put on the breaks?  Genest is a great guy, but it doesn’t change the fact that his office is under strong pressure to pass this "Big Five Big Taxes" budget deal…

Zycher’s responses (he is responded to Genest’ points here):
 
1. Mr. Genest continues to insist that there would be no transfers from (or reduced transfers to) the BSF after 2010-11, unless the governor decides that there is a need to "cover a current services budget."  Therefore, there will be such transfers from the BSF to the general fund as long as the governor decides that there is a "need."  And "population plus inflation," as I noted earlier, is far more elastic that Mr. Genest is willing to admit, so that the current services baseline in reality will not serve as the solid constraint that Mr. Genest wants us to assume.  That he does not really address those two points is the result of the fact that "the language of the constitutional amendment" makes it possible to manipulate the system.  Or does Mr. Genest want us to believe that such efforts to circumvent the language would be unheard of in that bastion of rigor known as Sacramento?
 
2. It is absolutely preposterous to argue that the trend line projection of revenues will serve to reduce the volatility of revenues.  Only a change in the state’s tax system—a reduction in the reliance on a highly graduated income tax structure—can do that.  Revenues will be whatever they will be; the revenue projections are supposed to act as a constraint on spending, and the BSF is supposed to serve as a buffer when revenues are weak.  But as long as future politicians can manipulate the new system—see my point above—the BSF will not serve as a buffer as well as it might otherwise, and, again, the argument that a reduction in transfers to the BSF will be limited to a current services baseline is weak in that the population/inflation baseline growth itself is subject to manipulation.  Should we bet on the future absence of such manipulation?
 
3. With respect to tax increases, Mr. Genest may not see the point, but it really is straightforward.  Yes, the two-thirds requirement will remain; but the issue is the behavior of the revenue trend model as a constraint on spending.  The specific language of the proposal excludes the future adverse effects of tax increases on the tax base, while including the assumed new revenues yielded by a tax increase for the then-current fiscal year.  That means that the revenue model, as specified in the proposal, will overestimate revenues over time in terms of the marginal effect of a tax increase; other things equal, that makes for higher spending, and a future tax increase more rather than less likely.  And Mr. Genest is assuming that support for future tax increases somehow never will achieve two-thirds support.  Really?  Forever?
 
4. Mr. Genest does little to refute my point about the effect of the revenue projection system in terms of reducing the perceived benefits of tax reduction; but it is just the mirror image of the argument immediately above.
 
5. Finally, Mr. Genest claims that future governors will find a "need" for reduced transfers to the BSF only "when revenues are in a major slump as clearly outlined within the language of the bill."  No, it is far from clear: Neither "need" nor "major" are defined, and political incentives to spend always are stronger than incentives to economize, particularly given the short time horizons of public officials. 

This entry was posted on Saturday, February 14th, 2009 at 12:00 am and is filed under Blog Posts.