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The buck stops here: Gov’s budget woes are self-inflicted

Is there anything new that can be said about the yearly budget ritual?

Probably not, but before your eyes glaze over, here’s a little historical context: The structural deficit persists because Gov. Arnold Schwarzenegger cut taxes when he first came into office by what is now nearly $5 billion yearly, and he has never made up the revenue loss.

His immediate “car tax” cut now will total over $20 billion since the governor took over. His defenders point out that it was a fair tax cut, much appreciated by all classes of people, particularly after the Davis administration and the Democrats had thoroughly bungled the issue.

But that’s not the point. Without replacement revenue, the finger-pointing about our perennial budget problem has to be directed at the governor. After all, that $20 billion could have paid off the entire deficit-reduction bond that was forced upon the state, or even allowed the state to avoid much of the borrowing in the first place.

The real irony is that the governor has been extraordinarily lucky on the revenue side in the years he has been in office. Yet the problem persists–and even grows worse.

First, he came in right after former Gov. Gray Davis had signed pioneering legislation to curb abusive tax shelters. The Franchise Tax Board pulled in over $1 billion from voluntary compliance to cover some of the immediate deficit, and ongoing enforcement and vigilance has kept much of that increase flowing. He then supported amnesty legislation promoted by Democrat Judy Chu, which, because of arguably unintended consequences on corporate payments, accelerated and then captured revenues by at least another billion, and probably more.

And, of course, he came in just after the stock market had hit bottom and then recovered to an all-time high, riding the capital-gains revenue and the Google IPO to a major bump in taxes from successful, profit-taking wealthy Californians. Income taxes rose by $25 billion since 2003, property taxes have jumped $12 billion as the result of the housing boom, and even the long-stagnant, loophole-ridden corporation tax rose by $4 billion.

So how does the governor propose to cover the deficit created by the governor’s tax cut?

With that old pre-post-partisan Republican chestnut: Cut the poor. That means kids on welfare, the aged, blind and disabled.

Then there’s “innovative” government: Sell off state assets for one-time gain, done many times in the past, most often with land and buildings, rather than off-budget agencies like EdFund. And there are the truly bipartisan budget chestnuts: Find every one-time gimmick you can to get us through to the next year, or at least make the books look better. This year, it will be to slow down the bond debt re-payments, thereby worsening next year.

The good news is that we would have had a relatively balanced budget and a healthy reserve during these good economic times if the governor had not cut billions in yearly revenue.

The looming question, of course, is what happens when economic conditions inevitably become unfavorable? The answer is deficits that are once again in the double-digit billions–even though we’re still paying off the last $15 billion. If you can’t balance the budget and accumulate a reserve during a boom, what do you do in a downturn?

The governor has an easy excuse for not fixing the revenue problem he created: The two-thirds vote required for new taxes. Republicans, with one exception, have already drunk the Grover Norquist, no-new-taxes Kool-Aid, err, pledge. But the governor cannot abdicate responsibility for creating the problem, and even a $5 billion revenue fix now would allow him to claim the tax cuts which have already occurred.

Politics aside, where would that revenue be found? Economists and environmentalists favor a carbon tax, which would generate $2 billion to $3 billion. The top income tax brackets could easily generate $2 billion more. The gaps in the sales tax on the temporary rental of space–admissions to professional sports and movies, use of golf courses, ski lift tickets, etc–and a sales tax on discretionary entertainment expenditures such as cable and satellite TV would together generate well over $1 billion. (These are not “services” but are goods which are taxed in most other states.) And a statutory fix in our loophole-ridden commercial-property-assessment system would generate over $1 billion, even though the real solution is eventually constitutional.

So far, post-partisanship has never applied to taxes and spending. So here’s a deal for the governor: raise revenues by just less than the car tax cut. Then the administration can claim billions in fair tax cuts during past years, a permanent reduction in taxes, and, with some luck, resolution of the structural deficit as well. Not likely? Well, we can be sure that the governor will leave office as yet another failure in the state’s long story of fiscal decline.


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