Monday, April 11, 2011

Brainstorming Reducing State Pension Obligations

I have been thinking for some time about legal ways to reduce state pension obligations for current retirees. This is important in California, because it is obvious that this Democrat controlled government won't do anything about the problem until the crisis is so immense as to be impossible to solve. The problem with just unilaterally reducing pension payouts and health care support for retirees is that the pension obligations are a form of contract, at least according to most legal readings I have reviewed. Further, the constitution appears to forbid action which would limit reduce pensions. There are prohibitions against bills of attainder and states may not pass a Law impairing the Obligation of Contracts. Finally, since state's have sovereignty, it is widely believed that they cannot discharge their obligations through bankruptcy. There has been some debate on Volokh on this, but this is my understanding of the consensus today. So it looks like all those pension benefits granted to state employees are a drain on the state's coffers forever, correct? Maybe not.

However, in the debate over Obamacare it became obvious to me that the federal government's power to tax is almost unlimited under the constitution. Ditto for the states. Everyone seems to agree that if the individual mandate had been passed as a tax, Obamacare wouldn't be on its way to the Supreme Court. So that got me to thinking about the state pensions. California could easily place a special tax on state pensions to reduce their burden. Further, the pensioners couldn't escape the tax because the California tax code treats retirement income earned while in the state as taxable by the state of California. State employee retirees could run but they couldn't hide, since the state could collect the tax revenue before they cut the checks.

Alternately, if this method was considered to be a bill of attainder, although I don't see how it differs from any other special taxes in the code, another approach suggests itself. The state could increase the marginal rates, but then exempt all sorts of income from the increase. Earned wages could be exempted for the purpose of job creation. Capital gains could be exempted on the basis of "encouraging investment." Social Security income on the basis of "fairness to the elderly" until all categories except state pensions were exempted from the tax increase. If necessary, the Tea Party should consider putting up such a measure on the ballot when the Governor and his Democrat cohort in the legislature fail to deal with the issue. Even if the measure were struck down by the courts, which I am hard pressed to see what reasoning they would use, it would have the salutary effect of showing that there is a limit on the capriciousness of the tax code.

Looking for input from fellow Tea Partyers or even lefties explaining how my plan might not pass constitutional muster.


  1. As the handling of Obamacare suggests, when is Constitutionality a concern when there are taxes to be taken! Interestingly, your thoughts correspond to Instapundit's:

    This is the most innovative idea for California's budget mess that I have seen. I hope to share this gem with others.

  2. Mutnodjmet, nice link. Thanks for for your support.