The State Capitol is hemorrhaging red ink. The non-partisan legislative analyst’s office (LAO) has released a report showing that the revenue shortfall from the budget just passed in August could exceed $10 billion. Fortunately the governor and the Legislature established a modest $4 billion reserve or the deficit would be much higher.
How did we get into this mess? If this seems like dí©jíæ vu all over again you’re right. It’s been just seven years since then Governor Gray Davis who inherited a budget surplus began to run up massive state deficits which were largely responsible for his being recalled. Moreover he was replaced by a candidate who stressed "Living within our means."
Simply put the tax and spend crowd — meaning the majority in the California Legislature — aided and abetted by some like thinkers in the governor’s office put on their rose colored glasses clicked their heels three times and hoped for the best. The budget signed a mere three months ago includes a mass of generous assumptions that have failed to pan out. Examples include: the billion dollar sale of EdFund a student loan program (which if it is sold may only collect $500 million) and increased property tax revenue which failed to take into account a declining housing market and glut of foreclosed properties. Additionally the LAO has been exceedingly generous in predicting the state’s general fund revenues will grow about 3.5 percent this year. If that fails to materialize the $10 billion hole may double. Of course all this comes on top of recently approved bond debt of nearly $50 billion (which amounts to nearly $100 billion after interest payments) and another $50 billion in unfunded pension liabilities.
Already there are rumblings by the usual suspects that we must raise taxes. The LAO has suggested among other strategies eliminating the mortgage interest rate income tax deduction. For ourselves we fail to see the wisdom of adopting a policy which will take a housing market which is already declining and put it into free fall. Sadly many of the recommended "revenue enhancement" options don’t seem to touch on the root of the problem which is unconscionable overspending by an irresponsible Legislature and a sometimes complicit governor.
During Governor Schwarzenegger’s tenure General Fund spending has increased 44% a far cry from the "blowing up boxes" to make government more efficient he expounded just four years ago. In 2007 according to the Tax Foundation our "Tax Freedom Day" (the day Californians pay off their yearly federal state and local tax burden) fell two days later then in 2006 on May 7th. This is a full two weeks later then 2004 Schwarzenegger’s first full year in the Capitol.
The governor is a man of vision who wants to see great things for our state. However he seems to have allowed his enthusiasm for immediate progress and improvement to cause him to lose track of their costs. We must find a way to say "NO" to the excesses of government spending as Governor Schwarzenegger sagely advocated just a few years ago.
It’s not too late for the governor to show real leadership in dealing with this looming crisis. With his popularity again high — especially relative to the Legislature — Governor Schwarzenegger has an opportunity to finally realize one of his campaign promises. According to the Public Policy Institute of California (PPIC) over 50% of the population does not want to see an increase in taxes.
This is the time to play up a bi-partisan issue that would resonate well with the governor’s populist agenda.
The governor should use his clout to push a "Deficit Prevention Act" through the Legislature that pegs spending increases to population and cost of living growth much as the Gann spending limit once did. By assuring taxpayers and business of spending stability and limiting the threat of new taxes he would open the door to the return of economic vitality.
Time’s a-wasting. The choice is Governor Schwarzenegger’s and what he decides may well define his legacy. Californians are desperately hoping his legacy will not be a sequel "Gray Davis II."
Jon Coupal is President of the Howard Jarvis Taxpayers Association — California’s largest taxpayer organization — which is dedicated to the protection of Proposition 13 and promoting taxpayers’ rights.