Those wearing green eyeshades in Sacramento seem to think that by taxing and spending more they can create jobs and reverse the current economic downturn. Yet California has been in the doldrums and state revenues have been flat or shrinking over the past few years not because its government is too small, but because it is too big. The latest budget crunch, along with Gov. Schwarzeneggers package of ad hoc responses to it, should be proof positive, if further proof were needed, that prosperity will return to the state only when government gets out of the way.
With $11.2 billion in red ink just six weeks after the budget for this fiscal year was signed into law, things arent quite so dire as they were when then-Gov. Gray Davis faced a projected $35 billion budget deficit for fiscal year 2004 and proposed a mix of spending cuts and across-the-board increases in fees and taxes, including upping the states top marginal personal income tax rate, the sales tax rate, and the excise tax on cigarettes.
Fast forwarding to present day, the same bad fiscal policy ideas are being championed in Sacramento, with a bit of a twist. Gov. Schwarzenegger wants to tax and spend the states way toward budget balance. But the combination of economic stimulus proposals he announced on November 6 is like rearranging the chairs on the deck of the Titanic after hitting the iceberg.
Except for tax credits granted to television and film production companies, all Californians will see their taxes go up. The governor is asking for a temporary (three-year) increase (from 5 to 6.5 percent) in the state sales tax earmarked for the General Fund, thus raising the core sales tax rate to 8.75 percent. As if that news werent bad enough for retailers and their customers, the few areas of commerce still state-tax-free in California will be added to the sales tax base. If Gov. Schwarzenegger has his way, sales taxes will be collected whenever you have your car or household appliances fixed or whenever you buy a ticket to a movie or to a sporting event.
Oil companies will be forced to pay a new severance tax on oil lifted from the states ground and territorial waters, and all employers will face a gradual increase in the taxes they pay into Californias unemployment insurance fund. And if thinking about higher tax bills causes you to want to visit your favorite watering hole, do it nowthe excise tax on alcohol will rise permanently by a nickel under the governors plan.
Higher taxes, whether levied generally at the retail level or imposed selectively on the consumers of alcohol and the producers of oil are job-killers that will place high-tax California at an even greater competitive disadvantage than it is already. John Maynard Keynes is turning in his grave at the thought that anyone would believe that raising taxes in a weak economy is a recipe for fiscal health.
On the spending side, Gov. Schwarzenegger wants to accelerate hospital construction to the tune of $160 billion and to use existing bond monies earmarked for infrastructure projects to pay for retraining residential construction workers in building something other than houses and apartment buildings. Shifting public works projects from the future to the present may stimulate the economy modestly, but such projects typically have long lead times and Californias taxpayers still have to finance them. Reallocating bond monies to job training programs means fewer funds for infrastructure later on.
Offsetting whatever economic stimulus those new expenditures would provide, the governor also asks for a $4.5 billion reduction in the General Fund, including $2.5 billion less for K-14 education and a somewhat smaller cut for the states institutions of higher learning, leading to higher out-of-pocket educational expenses for students and their families.
Budget cuts for the Department of Corrections and Rehabilitation, Medi-Cal, and other state-financed social services likewise are on the horizon, as are two fewer holidays for state employees.
Making common cause with Washington, the Governor also wants to help the states mortgage lenders renegotiate home loans in order to reduce foreclosure rates. One would think that lenders already have an incentive to do that very thing, as they have been doing for months in Florida.
No government can hope to balance its budget without encouraging growth in the private sector, which is its only source of revenue. The formula is well-known: cut taxes and cut spending; live within your means.