California: Fiscal Gridlock

NOTE: In a recent letter to The Times, Gov. George Deukmejian complained that this newspaper frequently proposes new state programs without saying where it would get the money to pay for them. On Wednesday, this column outlined the state’s budget problems in general. Today, The Times explains how the state came to find itself in such fiscal straits and what to do about them. Tomorrow, The Times will propose specific additions to the governor’s 1989-90 budget and the tax increases that would pay for those additions. The quality of life in California is crumbling in ways that every citizen can see--traffic gridlock on deteriorating highways, inadequate growth management, an education system at capacity and potential chronic water shortages, to name a few. Turning that trend around will take money and firm direction from Sacramento.

“Our problem is not a lack of revenues,” Governor Deukmejian wrote in a letter to The Times, published Wednesday, in which he challenged the argument that California cannot effectively deal with future growth without additional tax income. Low taxes have encouraged economic growth and this, in turn, produces more state tax revenue, he said.

But California’s fiscal structure is not providing the revenue the state needs, either to sustain many vital services at existing levels or to build the public works system the state must have to accommodate and manage California’s growth. Increasingly, the California business community is concerned that the failure of the state to maintain and expand its transportation system, schools and other public works will jeopardize the state’s economic vitality.

Part of the problem is that California’s system of taxation has been restricted over the past 11 years, primarily by initiative petition measures written into law by the voters. Deukmejian has offered tentative support for reform of the Gann spending limits, but opposes any general tax increase. He would accede to higher gasoline taxes only if approved by the voters.

More transportation revenue is California’s most urgent priority. Five years ago, the Governor’s Task Force on Infrastructure Review projected a 10-year public works deficit of more than $50 billion, including $15 billion for highways. Five years later, California is spending less ontransportation than any other state as a proportion of personal income. The state gasoline tax,the principal source of highway construction funds, remains unchanged at 9 cents per gallon. The highway project gap has grown to $20 billion.

The gas tax is the most obvious example of how California’s revenue system is failing to keep up with need. But it is only a part of a dramatically changed structure that has granted Californians $115 billion in direct tax benefits since 1978, according to the California Taxpayers’ Assn., a business-supported group. The tax revolt triggered by the Proposition 13 property tax rollback of 1978 has produced radical change throughout the tax system. Proposition 13 was followed by voter initiatives that set strict spending limits on state and local government (Proposition 4, theGann initiative of 1979), eliminated the state inheritance tax and permanently indexed the personal income tax for inflation.

Under Proposition 13, the Legislature can increase taxes only by a two-thirds vote, something that is almost impossible to achieve. Local tax increases can be raised only by a vote of the people. State budgeting was further constrained by last fall’s Proposition 98 that sets aside 40% of the state budget for public education.

State officials increasingly are turning to bond financing because bond funds are not counted against the Gann spending limits and need only a majority vote to pass. In 1988, $5.5 billion in bond funds were approved, raising the state debt to $13 billion.

So far, the debt level is not near a danger point, and California’s high credit rating remains intact. The major problem is that the state has no process for planning and budgeting capital construction needs. Bond issues get on the ballot on the basis of political appeal, not in relation to long-term priorities. The Legislature passed a bill last year to begin such a planning process, but it was vetoed by the governor.

Proposition 13 produced other distortions, such as the creation of a new layer of special tax districts to raise revenue that used to come out of general government funds. Counties have been squeezed from both sides--a loss of property tax revenue and an increase in responsibilitydelegated to them by the Legislature but not accompanied by enough money to finance the programs.

Money alone will not make everything right. California needs to come together as it did in the 1950s and 1960s to assess its problems and to mobilize the energy, political leadership and finances required to overcome them. But the “creative solutions” that have evolved in the post-Proposition 13 era--devices such as developer fees to finance public facilities as a way of getting around the law--will not solve California’s problems, either. These are indirect taxes thatfall inequitably on different groups of taxpayers.

At a minimum, the Gann limits should be based on a more realistic formula of inflation and population gain than at present so they accurately reflect the growing demands on government. And one way to eliminate some of the inequities created by Proposition 13 is to create a split assessment roll so that businesses can be taxed at a somewhat higher rate than homeowners. Since 1978, homes have carried an increasingly larger share of the property tax burden.

The first need is for a gasoline tax increase that will permit the development of an integrated transportation plan for the 21st Century. Second, the state must have some additional general revenue to maintain programs such as health care and education. Then, California leaders must begin untangling the fiscal pretzel that is paralyzing government. To deal with its problems, California must return to a rational form of budgeting on the basis of priorities rather than the arbitrary dictates of poorly conceived initiative measures.

The new tax money would not go for frills, nor would it jeopardize the state’s economic vitality. It is the very necessary investment that California must have if the state is to build a bright future.