REVIEW & OUTLOOK
California's Gray Hole
Will a budget deficit swallow the Golden State?
URL:http://www.opinionjournal.com/editorial/feature.html?id=110002802
Friday, December 20, 2002 12:01 a.m. EST
High school students learn about "black holes," those imploding stars that suck in everything around them, including light. Well, the world now has a new phenomenon called a Gray Hole that is swallowing everything in California, including common sense.
We're referring to Democratic Governor Gray Davis and his fabulous, ever-growing budget deficit. He now says the state's budget gap for next year is $34.8 billion and counting, up from a mere $21 billion last month, out of a budget of some $80 billion in total. The new deficit is larger than the budget of every state except New York, and more than the value of California's annual farm commodity sales.
"The problem is so big that we don't have a lot of time for hand-wringing," Mr. Davis said this week. "We have to face this problem head-on."
Oh-oh. You know what that means: Instead of wringing his own hands, Mr. Davis is preparing to wring out the pocketbooks of taxpayers. The suspicion in Sacramento is that Mr. Davis, who low-balled the deficit while running for re-election, now wants to make it sound so terrifyingly gigantic that he'll be able to justify a big tax increase.
Call it the hole that Gray himself dug. While the lazy economy has hurt tax revenues, the real culprit has been the state's runaway spending during the Davis era. In his first term, state tax revenues grew by 28%, far faster than inflation. But spending in the same four years rose by 36%, as the state government grew like Sweden's on steroids.
We suppose it's possible the Governor will yet redeem himself by hacking back on all that new big government. But his legislature is among the nation's most liberal, and its Democratic leaders are beginning to rebel against spending cuts. Fortunately, the state budget needs a two-thirds vote of both houses to pass, giving the minority Republicans some anti-tax leverage. Thus Mr. Davis's fright-rhetoric designed to scare the GOP into going along.
California already has some of the nation's highest tax rates, with an income tax of 9.3% that begins at an income of $38,291 for a single person and $76,582 for a married couple. The last time the state had a budget crisis, in the early 1990s, Republican Pete Wilson added an income-tax surcharge that was a boon mainly to the Rocky Mountain states where tens of thousands of Californians fled. There aren't that many easy marks still around: In 2000, about one-third of the state's personal income-tax take, a total of $15 billion, came from a mere 44,000 taxpayers.
We hope Republicans hold the line against a tax hike, and not only because they now run no part of the state government. Only a return to economic growth can fill a budget gap, and Mr. Wilson's tax increases ensured that the state recovered more slowly than the rest of the nation in the 1990s. In the short term, GOP State Senator Tom McClintock says that a 9.5% cut in spending, frozen for 18 months, would solve the problem.
Long term, California could look to Colorado, a state that didn't spend its way to trouble in the 1990s. Colorado has a constitutional limit that says state spending can't grow faster than the combined rate of inflation and population growth.
California once had a similar restraint known as the Gann limit that passed in 1979. It held state spending in check for a decade, until former GOP Governor George Deukmejian and Democratic legislators decided to slip the reins and run. They placed on the ballot the innocent sounding "Traffic Congestion Relief and Spending Limitation Act of 1990." In reality, it doubled the state's gasoline tax and altered the Gann formula to allow dramatically larger budgets. Bringing back some version of the Gann limit now would help California avoid its destructive pattern of spending booms followed by tax-raising busts.
There's certainly room for other reform. The American Legislative Exchange Council notes that Arizona has an educational system that significantly outperforms California's. Yet it spends only $1,800 per person for all state services out of the general budget, including education. California spends $3,000 per person, and will now have to impose real pain to pay for that profligacy.
The lesson here is that if surpluses during fat years aren't returned to voters in the form of tax cuts, politicians will spend every cent and more. Then when lean years hit they will claim, as Mr. Davis is about to, that the only solution is raising taxes. But that sets up a state for taxpayer flight and a more sluggish recovery. The only way out is to straightjacket the politicians before they can spend again. |
