GOP Can Seize the Moment

Finally, state Republicans may be doing something worthwhile: They may stop the unnecessary and unwarranted $8-billion annual tax increase that Gov. Gray Davis and the Democrat-controlled Legislature want to impose on California to balance the budget.

The last time voters rose up against higher taxes was in the late 1970s, and that property tax revolt gave us Proposition 13 and 16 years of Republican governors. They could rise up again, but that would require GOP legislators to take advantage of Davis’ budget mess. It’s not clear they have the will to do so.

California has an unprecedented budget problem because legislators and the governor approved measures to spend a revenue bonanza generated by the dot-com boom in the late 1990s, and when the boom collapsed, so did the state budget. The wisest correction would be to return to the fiscal structure that preceded the boom, not to raise taxes to cover expenditures that never should have been appropriated in the first place.

About 80% of the state’s revenue losses since 2001 can be attributed to disappearing millionaires. According to the state Board of Equalization, the number of millionaires (taxable income of at least $1 million) in California peaked at 44,000 in 2000. Because of the state’s highly progressive income tax structure, these millionaires collectively contributed about $15 billion to the state treasury. A year later, when the economy slowed and dot-commers went bust, the number of millionaires declined to 29,000, and their total tax payments dropped by $7 billion.

Nevertheless, Democrats who really want a Swedish-style social democracy in California are unwilling to repeal the program expansions financed with the dot-com windfall. Republicans need to make the case that the additional expenditures need to be undone.

Davis initially wanted to spend the dot-com windfall on one-time projects, but he got rolled by the big spenders in his own party. They incorporated the money into the budget base, meaning it must be spent every year to cover new and expanded programs.

Under Davis, state spending has grown by about 40% but revenues by only 25%. The governor now proposes to make up the difference with four tax increases.

The first would return the “car tax” to its 1998 rate, a $4.2-billion increase. This makes some sense. Lowering the car tax was part of spending the dot-com bubble. Restoring it to its pre-boom level would recognize the new budget reality. In any case, Davis is likely to raise the car tax administratively.

Davis’ three other tax hikes are not so easily defended. Upping the cigarette tax to $1.50 a pack is an absurd way to raise revenue since the state spends millions urging smokers to quit. Which will it be? Light up and balance the budget? Or don’t light up and avoid cancer?

Davis and the Democrats want to raise $1.5 billion by creating a new personal income tax bracket of 10.3%. This is unusually irresponsible, because the state got into its budget fix by relying too heavily on high personal taxes.

Yet the worst proposed tax of the lot is a half-cent increase in the state sales tax, a regressive levy that would raise already record-high state sales taxes. Davis says he needs the money to pay off $11 billion in bonds the state wants to sell to cover the projected 2003-04 operating deficit. But Wall Street analysts are of the mind that Sacramento needs to get serious about kicking its overspending habit. “[It] needs to make strides in dealing with the structural deficit,” says David Moore of American Century Investments, a potential buyer of the state bonds.

That, however, would mean repealing the new and expanded programs of the last five years -- and legislators would die the death of 1,000 cuts before they would do that.

Republicans aren’t being helpful here. Fourteen of the 32 Assembly Republicans opposed a bill that would have cut school spending by $5 billion; 17 of the 32 didn’t support the bipartisan budget-cutting bills enacted in March and April. The total cut was $8 billion. In his January budget, Davis proposed some major cuts, but he threw them out in his May revision. He’s now more likely to face a recall election later this year, so his revised budget has the feel of a condemned man searching for friends to save him.

Republicans have a political message in this budget quagmire, if they can only articulate it. Have the 40% higher budgets since 1998 made us 40% better off? Are there 40% fewer potholes? Are the schools 40% improved? Are streets 40% safer?

Because a lot of voters would probably say no, it makes sense to look at where the 40% budget increase went. A big chunk went to schools, but how much of it satisfied the demands of the teachers unions? How much went into salary and pension increases for public employees? How much supports fraud in the Medi-Cal system, estimated by the California Taxpayers Assn. at $2.5 billion?

Republicans aren’t asking these or other questions even though most beneficiaries of the higher spending reliably vote Democratic. Worse, one suspects that they will ultimately go along with some tax increases because they haven’t pushed for the large budget cuts necessary to avoid them.

If Republicans called for a general repeal of all the spending laws that have thrust the state into deficit, they could seize the political moment. If they urged legislators to adopt the spending and revenue levels (adjusted for inflation and population growth) of the 1995 budget, the shortfall would vanish.

If Republicans are to restore two-party viability in this state, they need a contrast with the Democrats. The multibillion-dollar budget gap provides exactly the right tool to achieve this.