Progress In the Golden State: Deficit Now Only $7.1 Billion

The budget California Governor Arnold Schwarzenegger proposed last week improves on the one he inherited three years ago from Gray Davis, by a factor* margin of……..$27.9 billion! Thanks to a surprise gouging of Google and its employees, the Gubernator has managed to turn in what the San Francisco Chronicle calls a "crowd-pleasing" budget that "appears to have silenced his biggest critics and appeased his Republican base."

Such a feat becomes easier when you're no longer even trying to produce a balanced budget, and that seems to be what California now expects. The 2006-07 budget spends $101 billion on $93.9 billion in revenues. All but two of the spending line items are getting substantial boosts, many of them by double-digit percentages. I can't hold this against Arnold, and I guess I'd take a $7.1 billion shortfall over a $35 billion one. My com-state-riates demonstrated last year, when they rejected even the anemic set of reforms in the special election, that they are apparently comfortable with this sort of thing. Last year I theorized that this was evidence of a mad and superstitious electorate, but the notion that California is becoming an ungovernable state did not originate with me. It's the apparent successes like this one, rather than the obvious budget disasters, that drive that home: Nobody except some pointyheaded wonk seems to think it's weird that California needs a balanced budget.

A few weeks ago, Virginia Postrel theorized about why Texas handles immigration better than California—because The Lone Star State's real estate tax gets revenue out of a wider base than Cullifawnia's personal income tax. Would that also help the Golden State pay for all the largess necessary to get a budget passed? Any tax experts out there willing to do the thought experiment? This year you would have needed to replace $48.7 billion in revenue—by far the largest source of funds. (The others are the the sales tax with $28.2 billion; the corporation tax at $10 billion; the insurance tax with $2.3 billion; the $316 million liquor tax; the Meathead's favorite, the cigarette tax, clocking in at $118 million; and a bunch of smaller items.)

And if you're really feeling ambitious, take the California Budget Challenge. (It's like the Pepsi challenge but it leaves an even worse taste in your mouth.)

* Thanks to movie critic extraordinaire Alan Vanneman for noting that Arnold's budget beats Gray's by a margin of $27.9 billion, and a factor of about five.

Comments

[Biff]

Both Virginia Postrel and the "California Budget Challenge" people seem to forget that California has a property tax. I know that my taxes aren't as high as they might be for an equivalently-valued home in Texas, but it's $5400 a year that's going out of my pocket to somewhere not of my choosing ...

[michael]

"My com-state-riates demonstrated last year, when they rejected even the anemic set of reforms in the special election, that they are apparently comfortable with this sort of thing."

I think that's a poor generalization. I voted against the "reforms" in the special election (aka waste of 60 million taxpayer dollars - good job ommitting that from this post). I am certainly not "comfortable" with the massive deficits.

One problem with your post - you blame the deficits on Davis and democrats. But the deficits of the last 3 years wouldn't have been nearly as bad if Arnold hadn't slashed the car tax when he first entered office. That tagged on another $10 billion to the deficit back in 2003 and who knows how much it's continued to add to it over the years. That's the problem with borrow-and-spend Republicans like Arnold. They lie to voters and promise them the world - less taxes and the same/more social services. He made all these campaign pledges to save money not by slashing education but by trimming bureaucracy and making everything more efficient. He even had a whole special committee set up to find areas of bureaucratic inefficiency to fix. They never did anything. Anyways, the long and short of what I am trying to say is that it is extremely fiscally irresponsible to do what Arnold (and to a greater extent the Bush administration) have done in terms of borrow-and-spending. I'm sure you agree with that - you'd rather they cut taxes AND spending - at least you're consistent. But don't pretend like Arnold is some savior for the state budget deficit, he's not. Like you pointed out, a good portion of the budget savings this year came from Google. Unless we get another google stock boom again next year the deficit will baloon again.

My personal opinion is that state revenues are too eratic from year to year due to our heavy reliance on the state sales tax. This causes us to increase spending massively during boom years and then go into massive deficits in bust years. I think we should decrease the sales tax and reform prop 13 to allow increases on property taxes for businesses and rich landowners to provide a more stable base of income. This would also be good for decentralization. After prop 13 killed local government's abilities to raise funds for their fire departments, police, and schools, Gov. Wilson had to massively increase the state sales tax and fund all of these local services at the state level. If we allowed localities to raise more revenue via property taxes, we could eliminate much of the centralization of funding of services that occurred in the wake of prop 13. I think our schools would stand to benefit the most. We used to be in the top 5-10 states in per pupil spending before prop 13 passed, now we are in the bottom 45-50.

[Phileleutherus Lipsiensus]

I can't hold this against Arnold...

Hayek and Mises would argue that Arnold should quit instead of giving in.

[Paul Rattner]

I took the budget challenge, and found it was rather flawed:

I had no problem finding a budget surplus, but I don't have a Democratic assembly and senate fighting every move I make.

The budget challenge did not offer me any opportunities to lower taxes. The only thing I could do was raise taxes or keep them the same.

When the budget challenge offered me a chance to reduce taxes, I took it, but most of the reductions were marginal--5% here, 15% there, etc. I couldn't slash departmental budges wholesale like I wanted.

A lot of people will say the governor's hands are tied with legal requirements, but if he just fired everyone in a department and hired no replacements, there would be nobody around to kvetch about the law's demands 🙂

[jason]

I enjoy Pepsi, especially when compared to coke.

[SR]

"Hayek and Mises would argue that Arnold should quit instead of giving in."

Maybe he's pulling a Francisco D'Anconia.

[happyjuggler0]

Michael,

Don't forget that what Arnold got elected on more than anything else (besides his name) was his promise to slash the much hated car tax. You call it an irresponsible shortfall of $10 billion dollars as a result. I call it $10 billion that the state can't spend now, and rest assured it would have, and likely without a decrease in the deficit. The current budget increases spending even though CA still has a huge deficit. Imagine what CA legilators would do if there were no such deficit qualms because of an extra $10 billion.

In a populace that insatiably demands more and more spending, yet somehow does not realize that such spending reams them in the tax wallet, then the best way to stem that demand for increased spending is to take some tax dollars off the table that can no longer be used to spend spend spend.

If California voters hopefully refuse to go along with tax increases, then there are only two ways to balance the budget. First, cut spending, or at least cut its growth rate enough to let revenues catch up. Second, hope we get more Laffer Curve effects from the Federal tax cuts.

In short, the problem is not irresponsible borrowing. It is irresponsible spending. Thus the solution is not irresponsible tax increases. The solution is to cut spending (growth).

[michael]

Happy,

"You call it an irresponsible shortfall of $10 billion dollars as a result. I call it $10 billion that the state can't spend now, and rest assured it would have, and likely without a decrease in the deficit."

But the government did spend that money even though it didn't have it! The year after Arnold cut it we had to borrow $15 billion instead of $5 billion to make up for the shortfall.

"In a populace that insatiably demands more and more spending, yet somehow does not realize that such spending reams them in the tax wallet"

This is true but it's only part of the story. Like I said before, Arnold irresponsibly played into these insatiable appetites by promising to cut taxes without cutting spending on services. He promised all he would do was make the bureaucracy more efficient.

"In short, the problem is not irresponsible borrowing. It is irresponsible spending. Thus the solution is not irresponsible tax increases. The solution is to cut spending (growth)."

The depends on where the spending cuts will be made. The moment Arnold's spending cuts hit our schools negatively he lost my support for his cuts. Destroying our state's human capital is only going to hurt our economy down the road.

[trostky]

Molly Ivins also has a theory about Texas and immigration: It is that since Texas offers very little in the way of public services to anyone, noone complains about immigrants' mooching off the welfare state.

[dead_elvis]

Certainly the taxing/spending situation is ridiculous. What I find particularly amazing is that on top of the regular budget problems, Californians keep voting to borrow more! Despite the huge deficits, we voted to borrow 3 *billion* for the stem cell fiasco (that was two years ago, and nothing has gone forward; it is tied up in the courts for the forseeable future). Now I have in front of me a primary election sample ballot, and on it are two initiatives; one taxes income above 400k to fund universal preschool (talk about blatant "screw the rich!" inter-class thievery), and another borrows 600 million for library funding. Now, I'm actually a fan of public libraries (ok, I'll hand in my decoder ring...), but the proposition spells out the screw job- it will cost the state 570 million in interest to borrow the 600 million. We're paying for *twice* what we're getting. An honest government would pay as it goes, and deal with the budget implications.

Why government, but especially the people who vote for these props, can't digest the simplest of household budgetary wisdom (I could save for a time and pay cash, or I could borrow, have it now, but pay twice as much for the same item) never fails to annoy me.

[OPUS]

Now all California needs is a few more ilegals and it can break even.

[db]

So how come, in all of the "California Budget Challenge," is the concept of reducing taxes or reducing spending never once mentioned? The best they can get is to spend the same as last year? I guess that's political skunk cabbage in the Gilded State.

[Robert]

Arnold irresponsibly played into these insatiable appetites by promising to cut taxes without cutting spending on services. He promised all he would do was make the bureaucracy more efficient.
Are you saying the bureaucracy is already optimally efficient, such that sufficient savings can't be had by making it more efficient? Or that it's inefficient but that increasing its efficiency is impossible for other reasons?

[thoreau]

Robert-

I'm as big a fan of cutting fat as anybody else, but I think it's foolish to plan on balancing the budget with that alone. The distinctions between fat and muscle become murky, and at some point you have to acknowledge that trimming fat will also mean trimming services. Which is fine with me, but not fine for some.

Which means that at some point the easy stuff ends ("Cut bureaucratic waste") and the heavy lifting begins (persuade people to make trade-offs), and then suddenly nobody is happy. That's especially tough in a state with very powerful public employee unions.

If Arnold is unwilling to sacrifice popularity by making trade-offs, or unable to get enough people in Sacramento to go along with it, then he's no better than the rest of them. Which may not be as damning as it sounds, because it could be that the task is beyond anybody's abilities in the current climate. But the fact remains that he's nothing special.

[VagueAtlasShruggedReference]

I think the phrasing "gouging of Google" was a bit much, overly-dramatic and disingenuous. Google wasn't specifically targeted, they just happen to have a good year.

Oh, and before I start sounding too different from anyone else. Taxes suck, Democrats obstruct, Republicans lie and they both spend too much.

[R C Dean]

since Texas offers very little in the way of public services to anyone, noone complains about immigrants' mooching off the welfare state.

Its a win/win!

[nmg]

I took that "california budget challenge" and it offered almost no chances for reducing costs or taxes. All the options tended to be either "maintain status quo" or "increase by X%".

Tells you where they're coming from.

nmg

[Ironchef]

Gee, raising taxes worked sooo well in the past.

[James Anderson Merritt]

Thoreau said, "If Arnold is unwilling to sacrifice popularity by making trade-offs, or unable to get enough people in Sacramento to go along with it, then he's no better than the rest of them. Which may not be as damning as it sounds, because it could be that the task is beyond anybody's abilities in the current climate. But the fact remains that he's nothing special."

This puts the spotlight on a key question: Do we in California (does anybody) really NEED a celebrity governor if he or she can't use that celebrity to purchase reforms that were promised during the election? Wouldn't we be as well off, or even better off, WITHOUT a celebrity governor?

My hometown newspaper recently observed that the two top Democratic challengers to Arnold this year were basically unknown to Californians, despite "years in public service." (In that respect, they resemble Arnold's predecessor, Gray Davis.) The newspaper wanted to elevate the visibility of the "two front-runners." Pretty soon, I'll probably see an article in that paper about the Quixotic challenge by Green candidate Peter Camejo. But will I see an article about Libertarian challenger Art Olivier? Not bloody likely, even if he comes to town on a campaign stop.

We're not likely to get the change we need by continuing to elect Demos or GOP. If we (and our "mainstream media") don't start looking seriously at alternatives -- third-party and independent candidates -- we'll keep getting the same-old same-old, whether we choose celebrities or not.