Prudence in Fat Times

In the late summer of 1998, Democratic legislative leaders and Republican Gov. Pete Wilson fought over how to spend a giant state budget surplus. Wilson insisted on a big cut in the state’s vehicle license fee, the annual tax on autos paid at registration time. The Democrats wanted to spend more money on the schools. Ultimately, a deal was made to end a long budget stalemate.

The car tax was reduced permanently by 25%, beginning this year. The reduction was to be increased in succeeding years to 67.5%, but only if state revenues continued to soar. The Democrats walked away grinning. They believed there was no chance the state would continue to reap such huge budget surpluses. Wilson may have the last laugh, however.

The Legislature’s independent fiscal advisor now projects, barring an unexpected economic slump, that the full cut will go into effect in stages, finishing in 2004. That would amount to a whopping $4.5 billion annually, says legislative analyst Elizabeth G. Hill.

The tax, previously 2% of a vehicle’s valuation annually, was reduced by 25% this year and will decline an additional 10% in 2000 because Democratic Gov. Gray Davis advanced the second step by one year. By 2004, the annual levy on a $30,000 auto would drop from $600 to just $195.

An additional bonus is in store for Californians who moved into the state during the 1990s. They are likely to receive a refund of the $300 smog impact fee they paid when they first registered their autos here. The fee has been declared unconstitutional, and Davis has endorsed a full refund, which could amount to $750 million, including interest.

Still, Republicans are calling for more tax cuts after learning that Hill expects the state to have a $2.6-billion budget balance at the end of the fiscal year June 30. That would grow to $3 billion in 2001, but the treasury would not be as flush as it might appear.

The state needs to maintain an emergency reserve of at least $1.5 billion, and preferably more, to hedge against an economic slowdown and other contingencies. As the vehicle tax cut is phased in, income and outgo will fall into closer balance. Revenues are forecast to be up by a phenomenal 10.6% this fiscal year, but less than 5% the year after.

The urge to spend, either on new programs or tax cuts, may be particularly strong in the coming election year. Davis and the Legislature can best serve the state, and voters, by keeping their partisan passions in check.