California’s Ongoing Budget Mess

In California, it seems that no one is really serious about getting the state budget under control, or about improving the state’s business climate. Keep in mind that California came in 49th among the 50 states and District of Columbia on the 2007 “Small Business Survival Index,” which ranks the states according to their public policy climates for entrepreneurship and small business.

The legislature finally came to a budget agreement after being 78 days left. But Governor Arnold Schwarzenegger doesn’t like the deal, and has pledged to veto it. And if legislators override the budget veto, Schwarzenegger has promised to veto hundreds of other bills.

Wow.

Well, which side is right? As it turns out, neither.

Consider the following from a September 17 Los Angeles Times report:

Schwarzenegger had warned lawmakers before they passed the spending plan, which was 78 days late, that he would reject it if it did not include three provisions to ensure the state a reliable rainy-day fund for times of fiscal trouble. This year, California has developed a $15.2-billion budget gap.

The Legislature agreed to two of his three requests, but balked at putting more restrictions on lawmakers' ability to raid the state's reserves…

By borrowing billions of dollars from taxpayers, their plan would avert deep program cuts as well as a multibillion-dollar tax increase that Democrats and Schwarzenegger had advocated.

The borrowing would consist of accelerated tax collections from individuals and businesses, taking cash now that otherwise would not come in until next year. That leaves a big hole for next year.

Schwarzenegger said the plan "takes our problems and makes them even worse. . . . The way this budget is right now, we will need a huge tax increase next year or to cut education severely."

Schwarzenegger was seeking an increase in the sales tax. Meanwhile, the legislature’s budget plays accelerates tax collections, and leaves in place the threat of big tax increase down the road.

If California’s elected officials were honest and courageous, they’d tell the truth that California has a spending problem. Particularly with some of the highest income taxes in the nation, the state certainly does not suffer from some kind of tax shortfall.

As long as California persists with government at these levels, every economic slowdown or downturn will result in massive budget shortfalls, accompanied by the threat of making the state’s tax system even less competitive than it already is.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council