Taking a Page From Reagan’s Script

Of all groups in California celebrating Arnold Schwarzenegger’s election as governor, one is especially giddy: the business community.

“I have hope,” says Jack H. Brown, chairman and chief executive of Stater Bros. Holdings Inc., the Colton-based supermarket chain.

Brown was so disturbed by recent sharp rises in workers’ compensation and other insurance costs mandated by the Legislature in Sacramento that he had held up construction of a $120-million distribution center for Stater’s markets. But confident now that Schwarzenegger’s election promises a change in the business climate, Brown says he has “instructed my staff to get the distribution center back on track.”

Such enthusiasm by businesspeople for Schwarzenegger recalls that which greeted the election 37 years ago of another actor turned governor, Ronald Reagan. The parallels between Reagan and Schwarzenegger go well beyond the big screen; the economic challenges then and now are also similar.

So are the limited options available -- a hard reality that should be both cautionary and instructive for today’s exultant business leaders.

The most visible problem for Reagan, as for Schwarzenegger, was a giant budget deficit. The root of that problem, then as now, was California’s growth in population and the state’s need for revenue to build and maintain schools, health systems and infrastructure.

California’s population was growing 26% a year in the mid-1960s when Reagan took office, and it was still feeling the effects of the 1950s, when population expanded at an astonishing 50% annual clip.

On the surface, the business climate was good: Big corporations generally supported Gov. Edmund G. “Pat” Brown’s regime as it floated on the economic boom of the ‘60s. But middle-class homeowners were getting restive about rising property taxes. And inflation, fueled by national expenditures on the Vietnam War, had begun to rise. In California, defense orders declined as Pentagon budgets financed jungle warfare more than it did the building of fighter jets.

Amid rising uncertainty, Southern California entrepreneurs such as car dealer Holmes Tuttle, immigrant oil wildcatter Henry Salvatori and drugstore builder Justin Dart formed a “kitchen cabinet” to back Reagan, who defeated Brown in 1966 and immediately had to cope with a budget shortfall of about $500 million.

At first, Reagan tried to trim state spending -- as Schwarzenegger vows to do now. But spending cuts couldn’t close the budget gap.

So Reagan solved his problems in 1967 with the largest tax increase ever imposed by a U.S. governor: $1 billion. (That translates into $5 billion in today’s currency.) Reagan levied those additional taxes not only on personal income, but also on corporations and on banks.

In fact, Reagan raised much more than was needed simply to close the budget deficit, reports biographer Lou Cannon in his new book, “Governor Reagan: His Rise to Power.” (Cannon also weighs in today on The Times’ Opinion page). The reason: to put the state on a sound footing for the long term.

For now, Schwarzenegger maintains that he won’t raise taxes, and his economic advisors say there should be no need to.

James L. Doti, president of Chapman University in Orange and an advisor to the governor-elect, says that “the deficit problem for fiscal 2004-2005 is already being reduced by the mild economic recovery.” As Schwarzenegger’s counselors see it, the future deficit is now down to about $4 billion, which can be “taken care of with a 6% drop in spending,” says Doti, an economist. “Very doable.”

As Reagan did before him, Schwarzenegger will reach out to Democrats in the Legislature for help with spending cuts to balance the budget. By appointing prominent Democrats such as former Assembly speaker and current San Francisco Mayor Willie Brown to his transition team, Schwarzenegger is already extending a friendly hand.

For the longer term, Schwarzenegger and his advisors recognize that change is needed for a state budget and finance system that is out of whack. Schwarzenegger is determined to see that this “budget situation can never happen again,” Doti says.

To fix it, the governor-elect promises to “go to the people.” He means more than just speeches on TV, says Tom Campbell, former Republican congressman and now dean of UC Berkeley’s Haas School of Business. “He will try to negotiate a program for tax changes with the Legislature, but if they don’t cooperate he will use the initiative process.”

Campbell says Schwarzenegger could put initiatives on the ballot to “roll back some of the restrictions” that tie a governor’s hands on cutting spending. Other experts foresee ballot measures aimed at reducing the importance of the volatile income tax in California’s financial structure, perhaps by introducing a flat tax.

In such ambitions there is another parallel to Gov. Reagan, who in his second term backed an attempt to impose a tax limitation on California as a way to restrict government spending. It became an initiative on the ballot in the 1972 election.

But the initiative was confusing to voters -- and to Reagan himself, he admitted -- and the electorate defeated it amid a California business climate that had turned increasingly uncertain.

As Schwarzenegger takes office, California’s business community has every right to cheer.

But it should do so with its eyes wide open. Though he insists that a tax increase isn’t part of his agenda, the governor-elect may ultimately have no choice.

After all, he faces both a deep budget hole and the need to accommodate growth that will add 6 million residents to California in the next decade. The rate of population increase may not be as rapid as that of the 1960s. But slowdowns in home building and infrastructure funding in the interim have left the state with a lot of catching up to do.

James Flanigan can be reached at jim.flanigan @latimes.com