Tuesday, December 27, 2005

Infrastructure and taxes

While driving into work, I was listening to an interview with Kevin McCarthy, top Republican in the California Assembly. He was asked if he favored the rumored $50 billion bond issue to repair California's infrastructure. He said that (a) he was in favor of the state taking some responsibility for the infrastructure and (b) perhaps a better way than a bond measure was to set aside a certain portion of the budget each year for that work.

It's an interesting position for two reasons.
  1. A bond issue does exactly what he wants: commits the state to spend a certain portion of its income on a certain project. Bonds must be paid, so if the state takes out a bond issue for a given purpose, it is committing itself to pay for that purpose until the bond is paid off.

    I'm sure that's not what McCarthy had in mind, but in fact, that's the way it works. By the way, I'm not necessarily in favor of a bond issue. $50 billion seems like a lot of money. But mechanically, a bond issue will do exactly what McCarthy said he wanted to do. McCarthy suggested spending 6% of state revenue on infrastructure each year. I'm sure a bond issue could be structured to do exactly that!

  2. McCarthy, like most Republicans, said he was not in favor of raising taxes—so that, for example, the revenue out of which a certain portion would be set aside for infrastructure work was adequate. But this is the big hole in that position. McCarthy is not willing to say what he thinks the right tax level should be. He and his anti-tax friends, have nothing good to say about taxes. But I doubt that he would vote to eliminate all taxes. He is not one of those who think the state should dry up and go away. He is in favor of the state having a responsibility for infrastructure. So the question is what is the right level of taxes? Does "No new taxes" mean that we are currently at the right level? Does voting for every tax cut, e.g., elimination of the "car tax," mean that we are at too high a level? If so what is the right level? As far as I can tell, McCarthy and others have no good answer to that.

    It's not even clear that the right answer is that taxes should be high enough to pay for whatever we decide the state should do. That doesn't take into account the possibility that we may not be able to afford everything we want the state to do. It's not clear to me if there is a good economic process for determining the "right level" of taxes.

    We do need taxes. After all, as the Republicans like to say, freedom isn't free. But how much should we be paying for it?

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