Jim de Bree | I’m Holding Onto My Wallet
By James de Bree
Tuesday, November 27th, 2018

I enjoyed reading Betty Arenson’s column, “Californians Grab Your Wallet,” in the Nov. 17 edition of The Signal, wherein she lamented California’s post-election financial consequences.

Like Ms. Arenson, I am particularly worried about tax increases when the Democrats have a supermajority in both houses of the state Legislature. I doubt that Governor-elect Gavin Newsom will have the same fiscal discipline as his predecessor.

I expect that sales taxes will soon be expanded to include a tax on services and entertainment.

For example, if you have your car repaired, you currently pay sales tax only on the parts, but not for the services. The Democrats have previously circulated proposals increasing the scope of sales tax so the entire amount of the mechanic’s bill would be subject to sales tax. Tickets to the movies, sporting events and other entertainment venues would also be subject to tax.

As Ms. Arenson correctly stated, ballot measures are almost always worded in a convoluted manner that distorts the measure.

The most common examples are school bond initiatives where the state-sanctioned disclosure methodology guarantees that the cost to the average homeowner is significantly understated.

Conversely, several measures on this year’s ballot actually were cost effective measures —sound fiscal policy is as much about spending the money effectively as it is about raising it.

The first of these was Proposition 2, which allows the state to spend a portion of the mental health tax (a 1 percent surtax on taxable income over $1 million) on housing the mentally ill while they are being treated. Substantially all mental health professionals agree that seriously mentally ill patients require housing while getting treatment. Failure to provide housing impedes the ability to properly treat these people. Consequently, our tax money was not spent effectively. The issue of whether funds could be spent on housing for the mentally ill was tied up in a lengthy court battle.

To expedite resolution, Proposition 2 was put on the ballot to change the law, rendering the court battle meaningless. Proposition 2 will result in more effective spending without raising taxes.

Similarly, Proposition 4 approved the issuance of bonds for children’s and university hospitals to fund new facilities. This method of financing certain hospital facilities has been employed for decades. These hospitals are largely funded by the state because they have a disproportionately high share of Medicaid patients. University endowments cannot be used to fund these hospitals — in fact most of the children’s hospitals are operated independently from the University of California.

These hospitals are not as credit worthy as the state, and if they arranged their own financing, it would be considerably more expensive. Because these additional financing costs would have been subsidized by the state anyway, Proposition 4 is another long-term cost-saving measure.

I find it odd that Ms. Arenson did not complain about Proposition 3, the water bond measure that was sponsored largely by Republican interests in the Central Valley. That measure, intended to finance local water infrastructure in three counties in Central California, was the most costly of all the bond measures and had few spending controls. Fortunately, it was defeated.

As I mentioned in an earlier column, considerable misinformation was disseminated by Proposition 6 gas tax repeal supporters. Today’s gas tax, when adjusted for inflation and improved mileage, is about a third of what it was when Ronald Reagan and Pete Wilson served as governor.

Last year I drove 2,500 miles — mostly through red states —from Cincinnati to Sacramento. Although the gas was cheap, I paid a significant amount of tolls. When I added the cost of the tolls to the cost of gasoline, the cost per gallon was greater than what we pay locally.

In the Oct. 22 Wall Street Journal, Robert Poole wrote a column entitled “How to Make Highways and Airports Pay.” In that column Mr. Poole suggested that states could save money by financing their highway infrastructure through the use of toll roads operated by private investors.

Before I retired, I worked with numerous private equity and real estate funds, some of whom were looking into public/private ventures involving toll roads.

Those ventures’ cost of capital is considerably higher than that of local governments, but utilizing those ventures allows governments to use “Enron style” accounting to keep highway costs off their books. The result is higher road costs for taxpayers. Had Proposition 6 passed, we would have enjoyed lower taxes, but faced significantly higher costs for the use of roads and highways.

One must understand the implications of each ballot measure in order to cast an intelligent vote. Unfortunately, rather than disseminating a true understanding of the measure and its underlying consequences, much of the media endeavors to reinforce preconceptions by appealing to the voters’ cognitive bias. When watching our wallet, governmental cost effectiveness is an often overlooked, but essential, component.

Jim de Bree is a semi-retired CPA who resides in Valencia.

About the author

James de Bree

James de Bree

Jim de Bree | I’m Holding Onto My Wallet

I enjoyed reading Betty Arenson’s column, “Californians Grab Your Wallet,” in the Nov. 17 edition of The Signal, wherein she lamented California’s post-election financial consequences.

Like Ms. Arenson, I am particularly worried about tax increases when the Democrats have a supermajority in both houses of the state Legislature. I doubt that Governor-elect Gavin Newsom will have the same fiscal discipline as his predecessor.

I expect that sales taxes will soon be expanded to include a tax on services and entertainment.

For example, if you have your car repaired, you currently pay sales tax only on the parts, but not for the services. The Democrats have previously circulated proposals increasing the scope of sales tax so the entire amount of the mechanic’s bill would be subject to sales tax. Tickets to the movies, sporting events and other entertainment venues would also be subject to tax.

As Ms. Arenson correctly stated, ballot measures are almost always worded in a convoluted manner that distorts the measure.

The most common examples are school bond initiatives where the state-sanctioned disclosure methodology guarantees that the cost to the average homeowner is significantly understated.

Conversely, several measures on this year’s ballot actually were cost effective measures —sound fiscal policy is as much about spending the money effectively as it is about raising it.

The first of these was Proposition 2, which allows the state to spend a portion of the mental health tax (a 1 percent surtax on taxable income over $1 million) on housing the mentally ill while they are being treated. Substantially all mental health professionals agree that seriously mentally ill patients require housing while getting treatment. Failure to provide housing impedes the ability to properly treat these people. Consequently, our tax money was not spent effectively. The issue of whether funds could be spent on housing for the mentally ill was tied up in a lengthy court battle.

To expedite resolution, Proposition 2 was put on the ballot to change the law, rendering the court battle meaningless. Proposition 2 will result in more effective spending without raising taxes.

Similarly, Proposition 4 approved the issuance of bonds for children’s and university hospitals to fund new facilities. This method of financing certain hospital facilities has been employed for decades. These hospitals are largely funded by the state because they have a disproportionately high share of Medicaid patients. University endowments cannot be used to fund these hospitals — in fact most of the children’s hospitals are operated independently from the University of California.

These hospitals are not as credit worthy as the state, and if they arranged their own financing, it would be considerably more expensive. Because these additional financing costs would have been subsidized by the state anyway, Proposition 4 is another long-term cost-saving measure.

I find it odd that Ms. Arenson did not complain about Proposition 3, the water bond measure that was sponsored largely by Republican interests in the Central Valley. That measure, intended to finance local water infrastructure in three counties in Central California, was the most costly of all the bond measures and had few spending controls. Fortunately, it was defeated.

As I mentioned in an earlier column, considerable misinformation was disseminated by Proposition 6 gas tax repeal supporters. Today’s gas tax, when adjusted for inflation and improved mileage, is about a third of what it was when Ronald Reagan and Pete Wilson served as governor.

Last year I drove 2,500 miles — mostly through red states —from Cincinnati to Sacramento. Although the gas was cheap, I paid a significant amount of tolls. When I added the cost of the tolls to the cost of gasoline, the cost per gallon was greater than what we pay locally.

In the Oct. 22 Wall Street Journal, Robert Poole wrote a column entitled “How to Make Highways and Airports Pay.” In that column Mr. Poole suggested that states could save money by financing their highway infrastructure through the use of toll roads operated by private investors.

Before I retired, I worked with numerous private equity and real estate funds, some of whom were looking into public/private ventures involving toll roads.

Those ventures’ cost of capital is considerably higher than that of local governments, but utilizing those ventures allows governments to use “Enron style” accounting to keep highway costs off their books. The result is higher road costs for taxpayers. Had Proposition 6 passed, we would have enjoyed lower taxes, but faced significantly higher costs for the use of roads and highways.

One must understand the implications of each ballot measure in order to cast an intelligent vote. Unfortunately, rather than disseminating a true understanding of the measure and its underlying consequences, much of the media endeavors to reinforce preconceptions by appealing to the voters’ cognitive bias. When watching our wallet, governmental cost effectiveness is an often overlooked, but essential, component.

Jim de Bree is a semi-retired CPA who resides in Valencia.