Red Ink: Process Is Problem

At the height of the national deficit crisis of the 1980s, the then-director of the Congressional Budget Office, Rudy Penner, was fond of saying, “The process is not the problem, the problem is the problem.” In California today both the process and the problem are the problem.

The problem is that the budget deficit cannot be corrected without significant increases in taxes and reductions in services. And California’s budget process is biased against making these needed changes.

The current state budget deficit came about because of an overreliance on capital gains revenues from high-tech companies and unwillingness to make permanent program cuts when those revenues disappeared. In the late 1990s, revenues from the state income tax soared from $28 billion in 1997-98 to a peak of nearly $45 billion in 2000-01. The overwhelming amount of this increase -- around $10 billion to $12 billion -- came from the taxation of capital gains and stock options.

This political windfall allowed Democrats and Republicans, liberals and conservatives, to achieve their policy goals without collecting more taxes from all but a few. Democrats could significantly increase spending on elementary and secondary education and health care for the poor. Republicans could take credit for the elimination of a series of tax hikes that had been imposed to deal with the large budget deficits of the early 1990s.

When the high-tech bubble burst and the economy weakened in 2000, the state’s personal income tax revenues declined by a quarter. Rather than making permanent spending cuts and tax increases, the state muddled through with a combination of one-time spending cuts and borrowing. This might have worked if the economy had quickly recovered and especially if revenues from capital gains and stock options had recovered, but neither occurred.

The bottom line is that long-term problems require long-term changes and that waiting to make these changes makes the problem worse.

Will our elected officials face the problem? The odds are against it. One reason is that the budget process is biased against enacting significant policy changes. To begin with, the state does not have to balance its budget. The Constitution merely requires that the governor propose a balanced budget. At the end of its fiscal year the state budget can show a deficit. This also means that any governor can fulfill his constitutional obligation by proposing changes that he knows will never be enacted. So as you read about Gov. Gray Davis’ budget, remember that what counts is not what he asks for but what he can get through the Legislature.

Over time Californians have supported a series of process changes that make it more difficult to achieve political compromises on spending and tax measures. The most important of these are, first, the two-thirds voting requirements for passing a budget and increasing taxes and, second, the creation of term limits.

Obviously, it is easier to get a vote of 50% plus one for a bill than a vote of two-thirds plus one. This can be seen by comparing how quickly President Bush will get his tax proposals through the House of Representatives, which operates by simple majorities, with the difficulty he will have in getting them through the Senate, where, in the event of a filibuster, a super majority of 60 votes from the 100 senators is needed.

The California Legislature is similar to the U.S. Senate. It is the only one in a large state that has super majority provisions. States that have these provisions have relatively smaller public sectors -- fewer services and lower taxes -- than states that operate under majority rule. So conservatives clearly support super majorities. But this structure has a high cost during times that require large and fast changes.

The current situation is made all the more difficult by term limits. With term limits the Legislature has lost much of its knowledge about budgets and budgeting. Members have to rely even more than in the past on the positions of their party leaders and lobbyists. The outcome is likely to be even more partisanship and greater difficulty in building compromises. Coupled with the super majority voting requirements, this is a recipe for deadlock. The last time California faced a budget crisis of this magnitude was during the Great Depression. Deficits grew until they disappeared with the military and economic expansion that accompanied World War II. It is hoped that it will not take another world war to solve the current situation.