Stop Picking on California

To no one’s surprise, California voters yesterday rejected 5 of 6 ballot measures intended to address the state’s budget problem.  

The propositions would have addressed the problem as it existed in February, not now.  The state then faced a $40 billion gap between revenues and expenditures over 18 months.  Lawmakers managed to close the gap after a marathon emergency session.  However, thanks to California’s labyrinthine budget rules, about $6 billion of these solutions required voter approval.  Hence, the state’s third special election in six years.

Unfortunately, in just a few weeks, California’s budget picture darkened considerably.  In March, the state’s non-partisan Legislative Analyst announced that revenues were already $8 billion below forecast.  By May, the governor projected that the state would face a $21 billion deficit through FY 2010 if all the ballot measures failed – or a somewhat less dire $15 billion if they passed.

Pity the revenue estimators.  Across the country, the ground is shifting beneath their feet.  As the economy relies increasingly on non-wage sources of income like capital gains, states with progressive income tax systems and a lot of high earners suffer a repeating cycle of boom and bust.  Data from the Rockefeller Institute report that state income taxes were down by 16 percent in the first quarter of 2009 and even more in some regions.  Market performance in 2008 and 2009 portends further declines in income taxes from capital gains over the next two years.

The morning after the special election debacle will see a lot of talk about tough measures— layoffs of state workers, prisoner releases, early school closings, Medicaid cuts, federal bailouts, and borrowing from Wall Street.  Taxes appear not to be on the table thanks to the defeat of Prop 1A – the spending limit that would have also extended some temporary taxes.  Republicans appear to have a case of recall fever, targeting anyone who even looks sideways at a tax increase.

Monday, Kim Rueben called for a new constitution tamping down the state’s initiative process and two-thirds legislative vote requirement, which can be an obstacle to timely – and perhaps more realistic – budgets.   Others have insisted that these and the elimination of Proposition 13 be part of any federal loan guarantees or other aid package.

California should hang tough.  It’s a big, boisterous, diverse, and dynamic state.  It may be the home of multi-billion dollar deficits and an initiative process on steroids, but it is also the birthplace of the PC and strong environmental emissions standards. For years, voters have been captivated by a “something for nothing mentality” on taxes and public services.  At the same time, lawmakers have avoided the tough choices.  That is only human nature, as is evident in Washington and state capitols throughout the nation.

Now is the time for the state to craft its own budget solutions, without too much money – and strings attached – from Washington or Wall Street.  The short-term capital needed to solve California’s cash crunch may be expensive, but it’s out there – unlike last fall.  California can borrow and cut to ride out the current crisis and then take a hard look at the budgetary and institutional changes necessary to prevent a recurrence.  It won’t be easy, but the state will emerge stronger if it takes control of its own finances.  As some have said, a crisis is a terrible thing to waste.