Budget Surplus Mania

Republicans in the California Legislature believe they have found election year nirvana in the proposed elimination of the state vehicle license fee, a form of property tax levied on automobiles at registration time. Now it appears that Gov. Pete Wilson may embrace the $4-billion fee cut, including some version of it in his revised 1998-99 state budget to be made public next week. But that would be a mistake. California’s problems will not be solved by motorists pocketing $100 or so a year.

There’s no doubt this is an appealing issue, something that did not escape the attention of state Republicans after GOP candidate James Gilmore of Virginia won election as governor last year almost solely on his promise to do away with that state’s auto tax.

But California has higher priorities than another tax reduction, on top of a business tax cut in 1996 and a $1-billion income tax break last year. Assembly Speaker Antonio Villaraigosa (D-Los Angeles) is correct in declaring that education should get preference in 1998.

Thus looms the outline of an election year struggle over what to do with a state budget surplus that might range from about $2 billion to as high as $4 billion.

The auto tax idea is the brainchild of Assemblyman Tom McClintock (R-Northridge). He proposes phasing out the levy over a five-year period. Californians now pay an average $185 in this tax in addition to their annual $27 registration fee. It sounds simple, but the plan has complex fiscal ramifications for both state and local governments.

Ninety per cent of the revenue from the vehicle tax now goes to cash-poor California cities and counties, as stipulated by a voter-approved constitutional amendment in 1986. McClintock claims that the loss of revenue can be made up by using a combination of surpluses and cuts elsewhere in the budget. Over the long run, the replacement revenue could be guaranteed by giving local government a greater share of state sales taxes, McClintock says.

There are several problems with this. The nonpartisan legislative analyst has predicted that revenue surpluses may end in fiscal 1999-2000. It is not prudent to commit to an ongoing program on the basis of a temporary surplus, much of it generated by a stock market flurry last year because of the cut in the federal capital gains tax. Such windfalls should be reserved for one-time spending programs such as Villaraigosa’s suggestion for purchase of new school textbooks or other critical education needs.

Meanwhile, there is no assurance that either the Legislature or the voters would adopt McClintock’s proposed constitutional amendment to guarantee new revenue for the cities and counties. Local government is still suffering from Sacramento’s annual $3-billion appropriation of property tax revenues during the recession of the early 1990s.

While the state bounty lasts, the first priority should be to increase the budget reserve fund as a cushion against a sudden downturn in revenue or an extraordinary cost such as a series of disasters. Wilson’s budget proposed a $296-million reserve. It should be at least $1 billion, well-informed analysts say.

The Legislature should also finance some onetime needs in education and other programs that still suffer from the recession years. These include a backlog of maintenance and construction in the state parks and local flood control projects. And at some point, the state must act firmly to ease the fiscal burden on local government.

Everyone would love a tax cut each year. But Californians should also invest for the future--in public schools, higher education, transportation and all the other facilities needed to assure California a strong economic future. Everyone would love a tax cut each year. But Californians should also invest for the future--in public schools, higher education, transportation and all the other facilities needed to assure a strong economic future.