2007 December 16 Sunday
Schwarzenegger To Declare California State Budget Crisis

Never mind that the state of California has both high state income taxes and sales taxes. Never mind that some states get by with no state income tax (e.g. Florida, Texas, Washington State, South Dakota, Wyoming). Never mind that some states get by with no sales tax. Politicians can spend beyond what they can get their hands on and cry for more. The economic downturn in California has boosted the state government deficit to about $400 per capita. The Governator is declaring a state fiscal emergency.

SACRAMENTO - Facing a projected $14 billion budget deficit, Gov. Arnold Schwarzenegger on Friday said he will declare a fiscal emergency, which will allow the governor and lawmakers to cut spending more quickly and also sets the stage for slashing state services and programs - perhaps by as much as 10 percent.

Legislative leaders said they will meet with Schwarzenegger next week to begin working on what the governor described as "across-the-board" cuts. His aides said departments have been told to prepare for a range of possible cuts, with 10 percent a central figure.

This crisis stretches back to 2001 and forced former governor Gray Davis out of office in 2003. Arnie won as his replacement and hasn't really fixed the problem. Now it has become too large to pretend it doesn't exist as the US economy slows down with high oil prices, a declining real estate market, and a banking crisis.

Dan Walters of the Sacramento Bee has an excellent succinct explanation of the California budget crisis: both the Democrats and Republicans can block each other's way to solve the crisis.

Just-the-facts rationality collides with the other two dimensions legal and political. Some of that extra spending, particularly the $2 billion or so given to schools, is locked into constitutional law and could be reduced only by extraordinary votes in the Legislature. Likewise, restoring the taxes that had been reduced, such as the notorious "car tax," would require two-thirds legislative votes.

The legal thicket creates a political impasse since Democrats don't want to reduce the former and Republicans won't rescind the latter. For more than a half-decade, the two parties have tolerated the deficits because leaders of both believed that when the day of reckoning arrived, which may be now, the other side would surrender.

Will Arnie get his way with the spending cuts? I think my taxes are already high enough, thank you very much. If they decide to raise taxes they won't get money from poor Mexicans who cost far more than they pay in taxes. Oh no, the middle class (shrinking as it is) and the upper class will have to pay.

Jobs losses and declines in retail sales both are contributing to a projected decline in state tax revenues (see the chart at the bottom of the page which is from Cal state Dept. of Finance). The decline in housing prices will also cut revenue growth for local governments.

The deficit is about 10% of the total budget.

Privately, Schwarzenegger and his aides have told lawmakers and interest groups that his January budget will reflect a shortfall closer to $14 billion, but he has not yet publicly released any proposals. The state's current total budget is $145.5 billion for the fiscal year that began July 1. General fund spending for day-to-day operations is $102.3 billion.

But if past experience can be relied upon the deficit could get much bigger.

"It was about this time of year in the last fiscal crisis under Gov. Gray Davis that they started leaking word of a $10 billion gap," said David Hitchcock, a credit analyst with Standard and Poor's in New York, referring to the state's economic downturn in 2002. "The following May the gap had grown to $35 billion."

A deep recession will cause more people to claim welfare benefits while also slashing revenues even deeper.

In percentage terms the 1991 budget deficit was much larger.

And who could forget the sobering Budget Crisis of 1991, when the Golden State was confronted with a $14.3 billion hole in a $55.7 billion budget. Legislators and then-Gov. "Cranky Pete" Wilson handled that with $7.2 billion in tax increases, $5.1 billion in spending cuts and $2 billion in parlor tricks.

California's financial crisis is going to continue for years and even decades to come. Unfavorable national demographic trends are further along in California. When Hispanics take over control of enough of the California state legislature to force through big tax increases on the white and Asian middle and upper classes this will drive the goose out to other states and many fewer golden eggs will get laid in the Golden State. The Hispanic Democrats (and what will be left of their white Democrat allies) will enjoy a pretty pyrrhic victory.

Share |      By Randall Parker at 2007 December 16 08:03 AM  Economics Political

tvoh said at December 16, 2007 3:02 PM:

New Hampshire has neither state income nor sales tax.

averros said at December 16, 2007 9:31 PM:

As a California resident, I wouldn't care less if the entire state bureaucracy just shuts itself down and goes away. In fact, I'd be delighted. These "Republican" and "Democrat" socialists screw the taxpayers in any way they could think of... with little visible benefits to the public.

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