Governor Must Find Room for Negotiation as Deficit Grows

The news about the state deficit gets grimmer by the week, and the choices more agonizing. The state began the year with a $7-billion deficit. By April it had jumped to $12.6 billion. Estimates last week put the gap at $14.3 billion, and it may go to $15 billion before the new budget year begins on July 1. But as the fiscal crisis deepens, Gov. Pete Wilson’s heretofore reasonable stance seems to be hardening at the very moment he needs to be most flexible.

Wilson has earned justifiable praise for squarely facing the budget crisis. His April proposal was a solid attempt to both balance the budget and reform state spending so as to prevent a repeat of this year’s problems. The package relies on nearly $7 billion in new revenues, largely from sales tax hikes, nearly $5 billion in spending cuts, and more than $1 billion in accelerated collections and other bookkeeping adjustments. Much of these savings come from massive, and painful, cuts in education and welfare.

Two sensible objectives guide Wilson’s budget. First, the governor doesn’t want to weaken California’s economy and threatens to veto any budget bill that might cause jobs to leave the state. Second, Wilson says his spending choices emphasize prevention over remediation.

Most legislators agree with Wilson’s objectives and his split between revenues and cuts, but they take issue with specific tax hikes and spending cuts. Wilson insists that his plan is the only way to achieve a stronger state economy, and that his is the only way to balance the budget. No negotiation.

Yet Wilson’s rhetoric ignores the reality of the give-and-take politics by which the budget has historically been negotiated. After all, reasonable men and women can disagree on specifics, even in such an unprecedented fiscal crisis. For example, we find the governor’s proposed 1 1/4 cent sales-tax hike, his major source of revenue, to be regressive. And the governor’s plan to make deep cuts in education is counterproductive to his aim of bolstering the state’s economy and inconsistent with his emphasis on “preventive” programs.

But with last week’s even grimmer $14.3-billion deficit estimate--an additional $1.7 billion gap--the issue for Wilson and the Legislature becomes less whether to endorse the governor’s package, but which additional revenues and cuts to add to it.

REVENUES: The fairest revenue addition--especially if sales-tax hikes are necessary, as they now appear to be--is to temporarily restore the higher income-tax bracket for wealthy Californians that was dropped in 1987. Doing so would raise an estimated $1.1 billion, more than half of the new gap. Currently, California’s highest income-tax bracket is 9.3%, levied on income over $55,000 for a married couple; this rate puts middle-class families in the same bracket as the state’s millionaires. Gov. Wilson has steadfastly opposed restoring the 11% tax bracket for individuals earning more than $100,000 and families earning more than $200,000, fearing that it will dissuade the wealthy from creating jobs or worse, prompt them and their businesses to flee the state altogether. That is a worthwhile concern, although its conclusion is debatable.

The point is that the 1980s saw a tremendous concentration of wealth nationally: Californians with income in the state’s top 1% saw their income grow by more than 75% from 1980 to 1988, more than for any other segment of the state’s population, while income of many of the poorest Californians dropped over the same period. Equity and fairness argue that additional revenue to bridge the new deficit should come from the wealthy rather than from the poor and middle class, who will be hit hardest by sales-tax hikes.

SPENDING CUTS: While Gov. Wilson insists that all programs must share the pain of repairing the state’s fiscal strength, his $2.1-billion reduction in education comes at a time when the state can ill afford to cut education. California already ranks well below the national average in spending per pupil. Forty-one states have a lower high-school dropout rate than we do. Achievement scores for the state’s third-graders have steadily declined since 1986, while enrollment continues to climb. Wilson’s cuts in K-12th grade spending run the risk of putting us further behind. Good schools are the key to a strong economy. Students who don’t graduate, or graduates who can’t read and compute, don’t have a bright economic future.

The governor has valid concerns about the financial straitjacket that Proposition 98, mandating 40% of state spending for education, put him in. It makes sense to suspend Proposition 98 for a year in return for smaller education cuts than those he proposed in April. Then, instead of balancing the budget disproportionately on the fragile backs of schoolchildren, Gov. Wilson might be better advised to eliminate specific state programs rather than making more across-the-board cuts. The governor can also make an important symbolic statement by cutting his own staff.

THE CHALLENGE: As budget negotiations intensify in the coming weeks, Pete Wilson is not alone in his worry about California’s economy. But compromise rather than intransigence is what’s needed. By giving in a little, Wilson could gain a lot.

More Red Ink

California’s rising budget defecit (in billions) July, ‘90: $3.6 Jan., ‘91: $7.0 April, ‘91: $12.6 May, ‘91: $14.3