Governor Schwarzenegger announced his plan to resolve California’s budget deficit. He proposes to sell part the future profits of the state lottery for a one-time payment of $15 billion. Lottery profits are currently dedicated to education, so voter approval will be required for this sale. In the event that the approval is withheld, then the state sales tax will be “temporarily” increased by 1%. The basic rate in California is currently 7.25%, but many jurisdictions add local surcharges. San Francisco, for example, has an 8.5% rate and would increase to 9.5% under this scheme. The IHT outlines the problem:

As it did when the housing bubble began to burst, California is leading the way in the next leg: a consumer bust.

Squeezed by rising unemployment, inflation in food and energy costs and plunging home values, Californians are cutting back on spending. Besides causing woes for state and local government, the cutback is giving California’s economy another knock and makes further job losses, home repossessions and banking problems more likely.

The figures are pretty bad. The median home price has fallen by 29 percent in the year to March, according to the California Association of Realtors, and repossessions are increasing.

Unemployment hit 6.2 percent in March, up 1.2 percentage points from the same month last year.

But most important, in the 10 months to the end of April, sales tax receipts in California are actually down in absolute terms. Gasoline tax receipts are essentially flat. When you factor in that there would have been considerable inflation during the period, and that some essentials like gasoline would have risen sharply in cost, the picture is clear: Californians are tightening their belts.

Borrowing future revenue will just make things worse. And by the way, the plan assumes that the state lottery can be made more profitable. Doubtful, because of the competition from Indian gaming and the poor odds offered by the lottery. State lotteries generally only return about 50% of the “handle” to bettors as winnings, poor odds compared to casinos, which often return more than 95%. The California lottery reported less revenue in 2007 than in 2006.

California governments need to come to terms with the reality that they cannot spend at current levels. Lavish employee compensation needs to be drastically cut back. As the economic downturn worsens, the shortfalls will increase. Tax increases will cause business activity to move elsewhere, to say nothing of driving away taxpayers who have some discretion about where they live. This is the beginning of California turning into a “tax hell,” which could precipitate some personal changes.

Last thing I remember, I was
Running for the door
I had to find the passage back
To the place I was before
Relax, said the night man,
We are programmed to receive.
You can checkout any time you like,
But you can never leave!