California’s Ballot Propositions: A Few Thoughts

In California, this year’s bumper crop of confusing and often contradictory ballot propositions are the best example of a bad idea that has rapidly grown out of control (our most recent post, The Tyranny of Direct Democracy, lays out the serious and intensifying problems associated with the state’s Initiative system).

But despite a distorted and misused process, this year’s state and local measures have potential consequences, so the specifics are important to consider. What follows is not intended to be Beacon Economics’ election ‘endorsements’—although our opinion is pretty clear in many places. It is a preview of how we think this election could affect the future of the California economy. Please note that we skip some measures that do not have a clear economic impact.

Prop 51 (School Bonds): Investing in California’s public education system is never a bad thing given the much-increased importance of education in long run labor market success and the rising costs of alternative private education. This measure seems like an easy win for the state’s economy.

But be wary of the actual outcome, since how this money is allocated across different needs will determine its overall public value. If this money is used to build yet another beautiful auditorium at Beverly Hills High, then taxpayers across the state shouldn’t expect much return for their dollar. This money should be heavily allocated to lower income communities in the state to have the most effective impact. How it will be allocated is not clear in the wording.

Prop 52 (Medical Hospital Fee): If passed, this proposition would make a specific fee on hospitals permanent. The collected revenue would fund the Medi-Cal health system. Without getting into the fine print, this fee is largely a tax on private healthcare plans to fund the rising cost of public ones—a process going on at many levels of government.

Whether this, on net, has a positive or negative impact on the economy is a coin toss. The deeper issue is that the funding part of healthcare isn’t where the long term problem lies—it is on the spending side. The stress on the state’s insurance systems comes from the fact that the cost of healthcare and the quantity being consumed is rising so rapidly. Until that side of the equation becomes the focus of policy debates, the problem will only get worse regardless of whether Prop 52 passes or not.

Prop 53 (Voter Approval for Bonds): Seriously? More direct democracy?!? Please say no!

Prop 54 (72-Hour Rule for Posting Bills): We like representative democracy—but only when our representatives are open about what they are doing and why. Prop 54 eliminates last minute bills that are voted on before the public has had an opportunity to take a look… and is a great idea. Whether it will have any economic impact is unclear.

Prop 55: (Extension of Proposition 30 Income Tax Increase): Prop 55 would extend Prop 30, the tax increase levied on incomes over $250,000, by 12 years to fund education and healthcare. As already noted, funding education is nearly always good, but how you fund it is a different question. While Prop 30 fits well in California’s leftist politics—soak the rich—it is terrible tax policy due to the instability of taxes collected on high income households in the midst of economic downturns.

They say the definition of insanity is doing the same thing over and over and expecting a different result. Through the last two recessions California has suffered mightily because of its strong reliance on revenues from taxing high personal incomes. The result was large multi-year deficits peaking at $20 billion. Prior to Prop 30, which passed in 2012, personal income taxes made up 40% to 45% of the state’s overall general fund revenues. Today, thanks to Prop 30, they account for over 60%. When the next recession hits (and there is always a next recession) expect the deficit to be massively large, with the capacity to swallow Jerry Brown’s rainy day fund in a few months.

This is bad because it intensifies the down part of the business cycle by forcing the state into emergency spending cuts. This ultimately hurts the kids who are unfortunate enough to be in school during those years—not to mention disrupting all sorts of long term investments in the state’s economy. California needs to stop setting itself up for a nasty crash and start to reform its broken revenue system.

Prop 56 (Cigarette Tax): Raising taxes on tobacco products (again) is yet another example of going back to the same well, over and over. At some point taxes will be so high as to make smokers find ways of dodging the tax altogether. Small taxes on broad bases are better than large taxes on small bases.

Prop 57 (Parole for Non-Violent Felons): From an economics perspective, keeping people in prison is expensive. It’s expensive while they are there, and it’s expensive after they get out because of the long term impact it has on employment and income prospects. Proposition 57 helps in this equation by increasing parole and good behavior opportunities for nonviolent felons, reducing costs on both ends.

Prop 60 (Condoms in Adult Films): Prop 60 would require the use of condoms during the filming of pornographic films and require producers to pay for certain health checks. Adult movie production used to be big business in Los Angeles until the County passed a similar rule. All that did was push the industry to other parts of the state. Prop 60 will only push it out of the state completely. If California truly cared about workers in the adult film industry, it would develop a system that encourages them to remain in the state with common sense protections. And yeah—this would be good for the economy.

Prop 61 (State Prescription Drug Prices): One of the worst things George W. Bush did while in in office was to implement a public senior pharmaceutical insurance that had an explicit rule forbidding the Federal government from negotiating drug prices. Thankfully this did not apply to the Veteran’s Administration. We like that this bill simply allows the state to work with the VA to limit the extraction of economic rents from California’s population by an industry that has been enjoying the overly generous nature of patents for too long.

Prop 62 and Prop 66 (Changes to Death Penalty Rules): Both of these propositions work to limit the enormous costs involved with carrying out a death penalty sentence in California, albeit in completely different ways. Reducing these costs is good for the state budget and hence the economy. Hopefully one of them will pass.

Prop 64 (Legalization of Recreational Marijuana): Functionally, marijuana use is already legal in California, since it is so easy to get a medical prescription. With Colorado and Washington already having legalized recreational use, it makes sense to keep up with the Jones. Additionally, this bill pushes local governments to take on the responsibility of regulating and taxing marijuana products, something they tend not to do now.