CA Bailout: Terminating Budget Dysfunction
Living in California, it was easy to let this type of thinking go to our heads. We, politicians and voters alike, began to believe in our own myth. The same rules that govern other states didn’t apply to California. We behaved in ways that were at best naive and at worst criminal. We ran the government in ways that made absolutely no financial sense, ramping up spending while refusing to raise taxes to pay for it.
Well, now, we’ve fallen with a thump back to Earth. Last Tuesday, the few voters who even bothered to show up at polling stations overwhelmingly rejected all of Governor Arnold Schwarzenegger’s budget initiatives, except for the one freezing legislative salaries. Even though few people actually believed that the initiatives would fix anything, they seemed to provide a temporary reprieve from our problems.
Now, that reprieve has ended and a last-ditch effort to get federal help was rejected. While the Obama administration has backed off its threats to withhold stimulus money, Treasury Secretary Tim Geithner has made it very clear that money from the Troubled Assets Relief Program (TARP) will not be used to help states. There are too many other states with their own financial problems. There will be no bailout for the Golden State. It is entirely possible that California will become the first state to go bankrupt.
The temptation at times like these is to resort to political posturing. In Sacramento, fingers are already being pointed and battle lines are being drawn. People on all sides of the aisle are railing against waste. If only we just stop (the other side’s) bureaucrats from charging fancy dinners to the taxpayer’s tab, then everything would be fine.
This is patently false and any legislator who knows anything should know this. California’s budget woes are a lot bigger than a few state employees living high on the hog. Next year’s projected deficit is over $21 billion. According to The Los Angeles Times, California could get rid of every single state employee from the Governor’s office to the DMV to the universities and still not get rid of our deficit. If that doesn’t tell you how serious this crisis is, nothing will.
The immediate solution will be deep across-the-board cuts and tax increases. However, California’s issues are deeply rooted in the very structure of a package of policies that all conspire to make the state budget both prone to crisis and difficult to correct after one.
The first thing that must be done is to reform the tax structure. California has an extremely progressive tax structure. The richest 1 percent of Californians pays half of all personal income taxes collected. Personal income tax receipts, the most volatile of all revenue sources, make up the largest portion of state revenue by far. While the state benefits during times of growth, it also means that California is more vulnerable to downturns than it otherwise would be.
Furthermore, California has fewer options during a recession. The two-thirds majority needed to pass the budget means that any real effort to balance the budget results in gridlock. Republicans refuse to authorize tax hikes and Democrats stall whenever pet projects go on the cutting board. The state is also hamstrung by the voter initiatives that are such a perennial part of politics in the state. Voters don’t vote based on the big picture. The result is that over the years, Californians have created various contradictory obligations that challenge any efforts at fiscal responsibility.
It is tempting to resort to short-term fixes, to slash programs and benefits to meet the immediate need. However, for California’s long-term fiscal health, fundamental changes must happen. If California is to learn from this current debacle and avoid another crisis, lawmakers and voters alike must admit that we have all been complicit in bringing the state to the brink and putting all of our sacred cows and untouchables onto the table.
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