What Goes Up, Goes Up--Rarely Down

The problem with government budgets is that the billion-dollar numbers so casually thrown around have no reference point in the real world. Economist Arthur Laffer calls them “MEGO” numbers--My Eyes Glaze Over. Here’s a simple way to convert MEGO dollars to family-sized ones: Every billion dollars at the state level costs an average California family of four about $120.

So when state budget writers proudly proclaim their first $100-billion budget, they are spending $12,000 of your family’s earnings, paid either directly as taxes or indirectly as higher prices.

Last year’s state budget was $82 billion. This year’s will be $18 billion more, for an increase of 21% in just a year. (And this doesn’t include an additional $6 billion spent last year, which brings the actual increase in state spending to $24 billion, or 29% above last year’s approved budget.) The average family will pay $2,160 more in taxes to support this boost in spending, plus $720 in between-budget spending.

During Gov. Pete Wilson’s eight years in office, which began with the biggest state tax increase in American history, total spending rose from $51 billion to $75 billion. Combined with last year’s budget, the $100-billion budget about to be sent to Gov. Gray Davis will increase the size of government more in two years than it grew in Wilson’s eight combined. Total state spending will have doubled in a decade, with more than half of that increase occurring just in the last two years since Davis became governor.

Put another way, the state budget is growing nearly three times faster than family budgets, and it is growing at their expense. Personal income will grow 8% this year; state spending will grow 21%. Not since the 1991 tax increases has government grown so fast compared to personal income.

Those record-breaking taxes, amounting to more than $8 billion, were imposed to solve a $14-billion deficit. At the time, Californians were promised the taxes were temporary measures, just to get the state through those tough economic times.

The worst of times have now become the best of times, but many of the “temporary” taxes remain largely intact. If raising taxes $8 billion in response to a $14-billion deficit was, as Wilson said, “the only responsible thing to do” in 1991, why is a similar tax cut so outlandish a response to a similar surplus in 2000?

Reducing taxes this year by the same amount they were raised in 1991 would relieve Californians of some of the most galling and abusive taxes that are currently on the books. The first is the “temporary” 20% hike in the sales tax. Politicians added three-quarters of a penny to each dollar of consumer purchases, promising relief as soon as the economy recovered. That relief never came. Finally fulfilling this broken promise would save California families hundreds of dollars each year.

Second, the state could abolish California’s outdated car tax, as other states from Virginia to Washington have done. Not a penny goes near our highways, and it amounts to a tax on a necessity of life in today’s world.

Third, California could abolish the 15-cent-per-gallon sales tax on gasoline at a time when rising fuel prices have wrought havoc with family budgets. Like the car tax, none of the gas tax goes to our roads, and its abolition could provide Californians significant relief just as they brace for another round of summer price increases at the pump.

Together, these reforms would save an average family nearly $1,000 in annual taxes, while still providing a $10-billion, 12% increase in state spending over last year’s budget.

Davis has said that he doesn’t dare cut taxes for fear the next recession could be right around the corner. Instead, the Legislature has proposed a one-time rebate averaging $222 per family and ongoing tax reductions of $102. Thus, these families end up paying $2,160 in additional taxes, ($2,880 when the between-budget spending is added), with only $102 in permanent tax relief. Curiously, permanent increases in spending aren’t objectionable; only permanent decreases in taxes--even taxes that were supposed to be temporary.

Years of experience have shown that politicians are much more likely to raise taxes than to cut spending in a recession. If Davis doesn’t restrain spending now, the next recession will ratchet taxes up once again to pay for all the new programs.

It is said that the state’s riches make this the easiest budget in a decade. Yet if lawmakers don’t take a strong stand now to control spending, they are setting California up for very harsh choices and hard times just around the corner.