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Center for Labor Research and Education

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Deficit reduction isn’t one size fits all

San Francisco Chronicle


When it comes to jobs and the economy, not all solutions to California’s estimated $20 billion budget shortfall are equal. Most measures designed to reduce the deficit can be expected to depress the state’s economy even further in the short term, but the magnitude of that impact will depend on which cuts are enacted.

At UC Berkeley’s Center for Labor Research and Education, we recently analyzed how many jobs in the state would be generated through $1 billion of spending on California’s largest health and human services programs: In-Home Supportive Services (which enables seniors and the disabled to remain in their homes), CalWORKS (temporary assistance to needy families), Medi-Cal and the California Healthy Families children’s health insurance program. We compared those findings to the job impact of taxing upper-income Californians and of levying an oil severance tax.

The results are eye-popping:

— Cutting in-home care services by $1 billion – reducing spending on the very old, the very young, the poor and the disabled is one of the perennial proposals to save state funds – would mean the loss of more than 215,000 full-time-equivalent jobs in the next year.

— A billion-dollar cut in Medi-Cal would slash more than 35,000 jobs.

— A tax cut of the same amount for upper-income households would lead to a loss of 6,400 jobs over the coming year, while the short-term job losses from a new oil severance tax (which would assess companies that remove oil from the ground in California) would total around 300.

What accounts for these big disparities in the impact on jobs?

First, California’s social service and health care programs attract significant federal matching funds. Under President Obama’s stimulus plan, the American Recovery and Reinvestment Act, for every dollar the state spends on Medi-Cal, it receives $1.60 from the federal government. For every dollar spent by the state government on in-home supportive services, we get $2.47 from the feds. So, federal dollars that flow to California can be considered new money to be spent by local residents, businesses and workers.

Second, health and social services programs have a strong stimulus effect. Low-income residents spend more of their earnings and spend more of it locally than do those earning higher incomes. Most of the spending on CalWORKS and In-Home Supportive Services goes directly to low-income households and is immediately recirculated through the local economy. In-home care has a particularly large employment effect because 85 percent of program funds go directly to wages. The program employs 360,000 Californians to assist people who are elderly or disabled. The average wage is $10 an hour, and most positions are parttime. Some 61 percent of home care workers have no other job.

The cuts have still broader economic implications for state revenues in contrast to a tax on those in the upper-income bracket or an oil severance tax:

— Cutting in-home services by $1 billion would result in an estimated loss of $359 million in state and local taxes, so the actual savings would be much less than projected.

— A billion-dollar cut to Medi-Cal would result in a loss of $285 million in state and local taxes.

— Raising $1 billion with a tax on upper-income households would result in a loss of only $73 million in state and local sales and other taxes, while an oil severance tax would reduce other tax revenues by $7 million.

The effects of cuts in social services would go well beyond jobs. Cuts to Medi-Cal and Healthy Families would result in delays in necessary care for adults and children, greater use of uncompensated care and emergency room visits and a higher number of costly nursing home placements for elderly and disabled Californians who would prefer to remain in their homes.

Our estimates are for a one-year change. The main effects of an oil severance tax would take place over 20 to 40 years but would be quite small compared with the other measures on the table.

While some contend that closing corporate tax loopholes would drive business out of California, there is no evidence to back up that claim. Taxes play a greater role in firms’ location decisions within a state or region than between states and regions, so access to markets and transportation matter much more than relative tax rates when a firm is choosing between the Golden State and Texas or Montana.

Lawmakers deciding California’s budget, revenue and jobs paths would do well to remember that state infrastructure helps to determine where firms locate. Transportation infrastructure is especially important, and educational infrastructure plays a role too because it helps states attract and retain skilled workers. California’s public universities and colleges have fed technical innovation in the state.

More than 2 million Californians cannot find jobs – the state’s unemployment rate is 12.6 percent – and many more are involuntarily working parttime. While trying to close the budget gap, the state should avoid measures that would deepen and prolong the recession or erode the very infrastructure we need to grow in the future.

Ken Jacobs is the chair of UC Berkeley’s Center for Labor Research and Education. T. William Lester is a post-doctoral fellow at UC Berkeley’s Institute for Research on Labor and Employment. To read the full report, go to http://www.laborcenter.edu/budget-solutions-and-jobs/