Even Reagan raised taxes

Gov. Arnold Schwarzenegger has joined the anti-tax Republicans in the Legislature -- that is, all of them -- in declaring, “You can’t tax your way” out of the state’s budget deficit problem. But, in fact, you can. California governors have been doing that for the last 40 years, and the most spectacularly successful were Republicans -- Ronald Reagan and Pete Wilson.

Anti-tax sentiment has become so deeply ingrained since the passage of Proposition 13 in 1978 that any GOP legislator who dares vote for a tax or fee increase is all but assured of losing the next primary election to a more ardent anti-tax candidate. Political ideology -- and the public’s knee-jerk response -- trumps good public policy.

In earlier days, the governor and lawmakers determined the state’s priorities first and then raised the revenue to pay for them. But now it’s all cuts. And although Schwarzenegger is often at loggerheads with his own party in the Legislature, he is with it on anything that smacks of a tax increase. His budget for the coming fiscal year proposes reductions in education funding, in aid to the blind and disabled, in payments to doctors caring for the poor, and more, including closing 48 state parks and historic areas.

To justify this, Schwarzenegger falls back on an old argument: “The people already are paying enough taxes,” he says, and higher levies will be counterproductive.

But how high is enough? The level of state and local taxes paid by Californians is just about the same as it was in 1970: 11.5% of income now, compared with 11.1%. The first big budget deficit in the last half a century was inherited by Reagan in 1967. He grandly declared “we will squeeze, cut and trim” state government and proclaimed a 10% across-the-board whack. But as Reagan learned then, and Schwarzenegger is learning now, across-the-board cuts -- as simple and fair as they may sound -- just don’t work. They fall unfairly on some crucial programs. No one would seriously suggest cutting the California Highway Patrol by 10%, for example. And the state Constitution and federal law prohibit other cuts, including some welfare programs.

Reagan ended up approving a $1-billion tax increase on a $6-billion annual budget, which was, proportionately, the biggest tax increase in state history. It left a fat treasury for his successor, Jerry Brown, but much of that was doled out to cities and counties to make up for property taxes slashed by Proposition 13. (The state got that back later by grabbing more than $1 billion of local revenues. The locals, of course, raised their own taxes to make up for the loss.)

Wilson took office in early 1991, just in time for a recession that hit California hard. Before long, Wilson and lawmakers were facing a $14-billion state budget deficit on a proposed budget of $56 billion. Today’s deficit, estimated at $16 billion, is close to that, but the budget is about twice what it was in 1991.

The plan Wilson worked out with the Legislature in 1991 contained $7.3 billion in new taxes and $7 billion in spending cuts and accounting changes. Wilson later said it was a mistake to raise taxes. But it worked. The state weathered the crisis and, in subsequent years, most of those tax hikes were rolled back.

Then came Democrat Gray Davis, the dot.com boom and bust, and a huge deficit. Davis doubled the vehicle license tax. He was recalled from office and succeeded by Schwarzenegger, who promised to cut up the state’s credit cards. In the very next breath, he canceled the car tax increase, thus increasing the state’s debt by $4 billion a year.

Over time, tax increases in bad years have been roughly offset by tax breaks in good years. But California needs real reform of its archaic and inefficient budget and tax system to put an end to this yo-yo system. Perhaps the most important step toward reform would be allowing taxes to be changed by a majority vote in the Legislature rather than the current, difficult-to-meet two-thirds requirement.

But no real progress will be made as long as Republicans support a fat sales-tax break for millionaires buying yachts and airplanes and the governor relies on closing state parks to balance the budget. Even Reagan, at his most tightfisted, wouldn’t have done that.