Monday, September 05, 2005

Read his lips: California may have to raise taxes

In March 2004, California voters approved Proposition 58, "The Balanced Budget Act," as an amendment to the California state constitution. It's still not enough when the state legislature refuses to cut spending when revenue falls short. So if Gov. Schwarzenegger can't, who will?
Calif. Governor Warns of Tax Increase

With his Proposition 76 spending control plan trailing badly in the polls, Gov. Arnold Schwarzenegger is warning voters he might be forced to reverse his stance and raise taxes if the measure fails in the Nov. 8 special election.

The measure, considered the cornerstone of the governor's ballot agenda, would impose spending caps on everything from education to health care and criminal justice. It also would give the governor new power to make cuts without legislative approval.

However, a recent poll by the Public Policy Institute of California showed that Proposition 76 was favored by just 28 percent of likely voters, with 61 percent opposed and 11 percent undecided.

Schwarzenegger, who has until now been steadfast against new taxes, told a radio audience in Sacramento on Friday that if the spending cap is not approved he might have no choice.

"Then we have to look at raising taxes, because this is the only option we have," he said in response to a question. "And this is why I tell people vote yes on Proposition 76 and make sure that we do everything that we can to pass this proposition so that we force our legislators once and for all to live within their means and not to continue spending money and to keep making promises to people that they can't keep."

Critics of Proposition 76 argue the proposal would give the governor too much authority over spending choices.

Bob Mulholland, spokesman for the California Democratic Party, said he did not believe Schwarzenegger would follow through with the threat, largely because it would alienate his own Republican base.
The story goes that many Californians in "voter retirement" came out of it to vote for Schwarzenegger (or at least vote for the chance to stop "politics as usual"). My best friend was one. She works in medical billing and deals constantly with MediCal, so she became very interested in Schwarzenegger's campaign when it talked about streamlining that bureaucratic nightmare (including throwing out the figure of saving $1 billion). Whatever happened to that, or turning California teachers' pay into a merit-based system instead of seniority-based one, or any other of the Reaganesque proposals that ushered Schwarzenegger into office?

California's Democrats have stymied Schwarzenegger in virtually all his attacks on the bloated state government. The teachers unions are especially powerful in blocking the reforms that threaten their power (they're perhaps even more powerful than the ones here in New York state, and trust me, that is saying a lot). This one opposes Proposition 76 because it doesn't do anything to improve educational standards -- a non sequitur, much like saying it does no good to cut back on dining out because it won't improve the quality of my home cooking. Californians may have "voted through Proposition 98 to promise our children access to high quality education," but Proposition 76 in no way "breaks that promise" like that teacher union claims. Do parents break a promise to clothe their children just because don't lavish them with unnecessarily expensive outfits, i.e. having the fiscal sanity to control their spending habits?

It goes without saying that politicians and special interests want to preserve such a status quo, but the blame is not entirely on the legislators. The people of California are very much shackled by gerrymandering (which is also being addressed in the November referendums), but they must bear some responsibility for re-electing leaders who tax and spend. No one ever said cutting government spending would be easy, but at "crunch time," people don't want the axe to fall on programs that benefit them. This November, Californians can prove that they have power over the state legislature, including its spending, and end the tradition of the state legislature having power over their wallets. And yes, it does include trusting the governor with additional powers, which aren't as bad as the propsition's opponent's make it seem.

The full text of Proposition 76 (scanned-in PDF) can be found here. Looking over it, I wish we had something like it here for New York state. Our state spending is out of control, especially on schools and the MTA (which waste so much of the money). One thing I very much like about Proposition 76 is that it forcibly "Continues prior year appropriations if state budget is delayed." That is to say, if the legislators can't get their act together, the bureaucracies must make do with last year's numbers, instead of engaging in greater carte blanche spending (and relying on state borrowing if they exceed the final budget allocations). New York could use that too: earlier this year, Albany finally passed a budget on time, the first time since 1985.

Permit me to speak from a general voter's perspective, as I do live across the country. (Though I did live in California for a few years when little, and I have a few friends who still live there, so I try to keep up with its politics.) I would question Proposition 76 if it gave the governor broad powers to increase or reallocate spending, but its main purpose is specifying certain spending limits while giving the governor the authority to curtail specific state expenditures according to those limits. "How" he makes the cuts are up to him, but California's state legislature has a clear way to avoid that: they can pass a budget within spending limits. (What a concept!)

Many have said before me that Californians must face the reality of their state government's spending. My favorite description was Schwarzenegger's in the 2003 debates:

Arnold Schwarzenegger: What you have to do is put a spending cap on it. You guys have an addiction problem. You should go to an addiction place because you cannot stop spending. What happens then is if you keep spending...

Cruz Bustamante: (interrupting) Well, that's what happens when you simplify things.

Arnold Schwarzenegger: What happens then is if you spend, spend, spend, then you have to tax, tax, tax, but all of a sudden you say, 'Where are the jobs?' Gone, gone, gone. That's the problem that we're facing here.
Call it a "structural budget deficit" or other euphemism, but who doesn't understand that California's state government simply spends too much for the tax revenues it can collect? The state legislature won't cut spending by the necessary amounts, and if voters won't approve a law that mandates spending limits and gives enforcement powers to the governor, then the people must be prepared to pay higher taxes. How long can California's economy sustain these massive budget deficits?

The difference at the federal level is that the U.S. has a more palatable tax climate overall (though still too high, I believe), while California's is infamous for being "unfriendly" to businesses. Only in the last two years has California stopped bleeding jobs (this page at the Bureau of Labor statistics can give unemployment information by state). There also isn't a major foreign country (China) that's eager to buy California bonds to back its unstable banking system. (Note that I'm only saying the current federal budget deficits are not a problem considering overall U.S. economic performance and foreign lenders' willingness. I'm among the first to accuse the federal government of wasteful, unproductive spending that violates its Constitutional limits.)

California's credit rating has been upgraded slightly since spring 2004, but this is where an "A" doesn't send you to the head of the class. Other states with better debt levels and AAA ratings are more enticing to bond investors, so California must offer higher interest rates. This means California spends hundreds of millions of dollars more to repay its bonds (which are in the tens of billions of dollars), when both burdens on the taxpayer can be avoided by engaging in a bit of fiscal austerity today.

Californians must find a way to force their state government to cut spending. Higher taxes can easily destroy their state's young economic recovery; enough people and businesses have already fled.

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