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Ending budget thrill ride

By Robert Wassmer -- Special To The Bee
Published 2:15 am PDT Sunday, May 7, 2006

California state government seems as if it should be in relatively good fiscal shape.

In February, the Legislative Analyst's Office predicted the state's reserve ("rainy day") fund at the end of this fiscal year would be $6.5 billion. But that doesn't mean the state is spending less than it takes in.

This year, California is expected to spend $2.6 billion more than its projected revenue. It will finance this with last year's $9.1 billion reserve from unexpected increases in state personal income, corporate income and sales taxes revenue; the proceeds of a state tax amnesty program; and $10.4 billion raised through deficit bonds issued two years ago.Last week, early reports indicated that personal income tax payments this year are up 40 percent from last year. The continued operating deficits (or a "structural deficit") likely will drive the state's reserve fund into the red in less than two years.

The ups and downs are not new. California's state budget has been on a fiscal roller-coaster for at least two decades. To ease the queasiness we all feel from this statewide fiscal thrill ride, we must eliminate, or at least try to diminish, the factors that have built it.

California is one of only three states that require a two-thirds majority for the annual passage of its budget and one of only 11 that require the same majority for a tax increase.

Since the passage of Proposition 13 in 1978, California voters have passed at least 10 initiatives that make it more difficult to balance the state's budget. More than other states, California relies on individual income taxes, sales/gross receipts taxes and corporate income taxes. All of those revenue sources fluctuate over the business cycle. During the last recession, California tax revenue declined from $76 billion in 2000-01 to $63 billion the following fiscal year. This loss was almost entirely due to a fall in personal income tax revenue caused by a reduction in realized stock options and capital gains claimed by those in the upper tax brackets.

Suggestions by the multitude of commissions, studies and individuals who have explored ways to get our state off its fiscal roller coaster fall into two categories: change the institutions and rules surrounding the budget process itself or alter the way (and/or amount) that California raises revenue for its state and local governments. Over and over, experts have suggested reforms that include reducing the two-thirds vote requirements, creating greater fiscal discipline, moving to multi-year budgeting and improving the public's and legislators' understanding of the budget. Suggestions for raising revenue include increasing reliance on tax bases that are more stable over the business cycle, raising more state revenue and reducing local government dependence on state revenue by shifting to greater local tax reliance.

According to a January survey by the Public Policy Institute of California, more than 90 percent of state residents believe the budget situation is a problem. Objective analyses support the reforms of the budget process and revenue described above.

But, in California, these reforms require voter approval and/or a two-thirds vote in the Legislature - things that have not been forthcoming.

In the current gubernatorial race, Phil Angelides has offered a "solution" to the state's structural budget deficit. He would increase the top-level personal income taxes; but this is coupled with an increase in K-14 public education spending.

Structural deficits are not eliminated by spending a significant portion of new revenue; and the state's fiscal instability is not dampened by tapping further into a tax instrument whose yield fluctuates widely over the business cycle. Unfortunately, Steve Westly and Gov. Arnold Schwarzenegger are following the safe campaign strategy. They publicly admit the state has a budget problem but stay away from specifics on how to solve it.

A ticket off of our fiscal roller-coaster will cost us in two ways: by increasing state revenue or by cutting state expenditure and moving to more stable revenue sources. Polls indicate the California electorate likely would favor increasing revenue through higher income taxes on the wealthy, but our two-thirds vote requirement has effectively prevented this. The experience of our previous governor after he raised the state's vehicle license fee makes a shift to more stable revenue sources a difficult choice for a politician to make.

So enjoy the current ride up the crest of the hill, but as with any roller coaster, anticipate the drop that is very likely ahead.

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