Get Ready for a Budget That Everyone Will Love to Hate

There is no joy in Sacramento. The California state budget--a $50-billion-plus-a-year Goliath--is looking worse every day. When the final budget is agreed upon, sometime this summer, state representatives will have gone through hell, and horrific pain will begin to be felt throughout the state. The problem is that California is a little short this year. About $13 billion short.

That’s real money by any standard, but so far no one has put a proposal on the table remotely close to realistic. And the only detailed proposal to date (a slash-and-burn job from the Senate Republican leader) would cut so many programs so drastically that no one is taking it seriously--perhaps not even the author himself, Ken Maddy. Gov. Pete Wilson first proposed a balanced budget in January, but since then the lengthening recession has revised revenue estimates further downward, putting the budget even more out of balance. He is expected Thursday to release a new, more realistic budget.

MISERY LOVES COMPANY: That budget is said to be one that “everyone will hate.” As Wilson gets further into this daunting problem, he should take some solace from the thought that other states are in the same leaky boat. This fiscal year about two-thirds of all states are running deficits, forcing many governors into expenditure-reducing or tax-raising positions with which they are personally or politically uncomfortable. And governors of states with the biggest revenues have proposed packages that include hefty new taxes as well as dramatic cuts.

The current revenue-raising is only the third big wave of new taxes since the Depression of the 1930s. Governors in three states--Connecticut, Tennessee and Texas--that have long opposed imposition of a state income tax are now proposing just such a tax. Other states, including Rhode Island and Vermont, have adopted or are considering increases in personal and corporate income tax rates. Nevada is weighing a payroll tax. Others are looking to less comprehensive measures, such as a sales-tax hike.

Nor is Gov. Wilson necessarily facing the toughest problem. Connecticut’s Lowell Weicker, New York’s Mario Cuomo and New Jersey’s Jim Florio face mountains of red ink, too. Connecticut’s $2.6-billion deficit is larger, relative to the state’s total budget ($6 billion), than that of any other state, including California’s. Indeed, there is now so much fiscal misery in so many states that the traditional basis for opposition to new taxes, that they will cause business and jobs to flee the state, may be increasingly invalid. As deficits multiply and state after state raises taxes, there are increasingly fewer “low tax” states to which businesses can flee.

KNOW THY PROBLEM: California’s $13-billion deficit is really three smaller deficits. Understanding that makes coping with the problem just a little less daunting.

First there is a $4-billion recession-caused deficit that hit this fiscal year. Then there is a predicted $4-billion deficit in next year’s budget. And there is a $5-billion deficit that results from a growing structural imbalance in state government itself. This tripartite analysis implies that an economic recovery will close the recession-driven portions of the deficit; but that California, like most other states, will continue to face a long-term structural gap between how much money the state brings in and how much it must spend.

Wilson can close that $5-billion structural gap only by either reducing program commitments or raising taxes on a permanent basis. But since the two $4-billion deficits are creatures of the recession, the remedies Wilson applies to that portion of the deficit should be advertised as a temporary, one-time-only measures. By not focusing the debate on a mix of temporary and permanent changes, however, Wilson and Sacramento legislators risk leaving the impression that all of the revenue increases they inevitably must propose will be permanent. That risks undermining public understanding of the problem and support for the inevitably painful solutions.

KNOW THY SOLUTION: That solution will require Sacramento to continue to make prudent cuts in the budget. This will require considerable imagination and courage. Every cut will hurt, but not all cuts are equally painful. And not all cuts should be viewed as permanent: Some should be considered as recession-driven, and therefore temporary.

So too on the revenue side. If Wilson on Thursday proposes some new taxes, as he inevitably must, he should look to some temporary fixes--i.e., a one-year increase in the sales tax, or a one-year extension of the sales tax to services. But against the $5-billion structural gap, he will need to look for more permanent revenues, such as restoring the 11% income-tax rate for the affluent, or closing some bank, oil-industry and corporation tax loopholes.

Changes in income, corporation or property taxes would not generate significant revenue until tax collections come due next year. This is fortunate, because new taxes surely will not help California climb out of the current recession. The governor needs to delay the impact of new taxes to the greatest extent possible: If we are not careful, we might suffocate the hoped-for recovery. But the recession-caused deficit needs revenue remedies now. That means a near-immediate hike in something like the sales tax.

Wilson will take such measures not because he wants to but because he has to. Like his fellow governors around the country, he is in a tight spot and has no choice. During his campaign for governor he did not flatly forswear any new taxes. He was being honest with the voters then; he will need to be just as honest tomorrow.