Last Chance to Be a Hero

When Arnold Schwarzenegger declared his improbable candidacy for governor last summer, he recalled that California had been “a place of dreams” when he came to the state 35 years before. “This great state said to the people everywhere: ‘Come here, work hard, play by the rules, and your dreams can come true.’ ” Schwarzenegger promised to restore the California dream.

And maybe he still can. Even those who opposed or indeed ridiculed his candidacy were impressed by Gov. Schwarzenegger in his first few months. His very improbability helped, along with his amiable pragmatism, his frankness and his fresh eyes on a tired old scene. Here was a nonpolitician who might really do things differently.

Today, that recalled California dream looks all too dreamlike. California was not brought to its present unhappy pass just by today’s warring politicians. The primary responsibility rests with a citizenry that wants more government than it is willing to pay for. Schwarzenegger so far has been no more willing to confront citizens with this truth than any of his politician predecessors. As a result, his first budget -- still stalled in the Legislature -- does nothing to address the state’s underlying problems and therefore will make them worse. It doesn’t take a Terminator to borrow $15 billion.

A Paralyzed Dream

The California of Schwarzenegger’s dreams has a government all but paralyzed by voter-approved initiatives, polarized political parties, powerful special interests, unrealistic public expectations and a 125-year-old state Constitution so haphazardly amended that it has become a dysfunctional document. Add to that a spiteful anti-tax mood fanned by business interests, which constantly chant the myth that Californians are grossly overtaxed.

The result is that the impasse over Schwarzenegger’s first budget is far deeper than immediate policy differences between the governor and legislators.

The state has become almost ungovernable, the cumulative result of “reforms” by both legislators and the public. These include the Proposition 13 tax revolt, legislative term limits, legislative redistricting that elects extreme conservatives and extreme liberals -- there is barely a moderate center anymore -- and the two-thirds vote requirement for almost any action that involves money.

The new governor seemed to think he could overwhelm any problem with his personality, and to some extent that has happened. But governing, and especially adopting a state budget, is an immensely complex effort that involves deal-making among every moneyed special interest in the state, from banks and businesses to environmentalists and public employee unions.

Still, there would have been no budget impasse if California’s rules were similar to those of 47 other states and the national government: Pass a budget by simple majority vote. Even though the state Legislature has long been dominated by one party, it is difficult to find consensus even among Democrats, let alone get two-thirds of Assembly and Senate members to agree on anything.

Then there’s the politically safe but economically dangerous reliance on borrowing. If state revenues are not adequate to meet the services the people demand, raise them or cut the services and explain why. That’s what California used to do, and what the majority of other states did during the recent recession. Now, many of those states have weathered their deficits and are growing again.

Sure, under present conditions that would mean majority Democrats would get their way. But Schwarzenegger still has final say with his veto power. It’s a more effective tool than his bluster over the weekend about “terminating” in November elections the state legislators who resist him, since all but a handful occupy seats designed by the politicians themselves to be safe for the winner of the primary elections back in March.

Even after this budget is adopted, the state will face a structural deficit of more than $5 billion next year -- meaning it will be short that much if it opts to pay for state services at current levels. That means much more painful service cuts down the pike.

Schwarzenegger’s description of the Golden State of 35 years ago was accurate. California was the progressive model for the rest of the nation, with the best public schools, the best highways, a renowned university system and the grandest water project in the world. They were built by visionaries such as Govs. Earl Warren and Pat Brown, aided by moderate leaders of both parties and business figures who knew what the state needed to sustain a growing economy. Businesses needed a first-class transportation system to get their goods to market. They needed a strong education system to provide trained employees. Entire industries sprang from research at the University of California.

Working together, these farsighted leaders knew that to maintain its leadership, California needed a progressive system of taxation supported by a public that was willing to pay its fair share for the services and facilities it was demanding. All of that began to change under Ronald Reagan, who kindled the anti-tax mood in California that ultimately blossomed into Proposition 13 in 1978. There’s irony in the fact that in his first year, Reagan raised taxes by $1 billion (with a total budget of $5 billion), still the greatest tax increase in state history.

The drop in government revenues caused by Proposition 13 has been widely reported. The good it did cannot be overlooked. It stabilized property taxes and, as a result, California now ranks as low as 26th in the nation in the burden of state and local taxes on its citizens -- better than Utah, Arizona and Idaho, states that anti-tax forces claim are stealing business from California because taxes here are too high.

Groups such as Cal-Tax and the increasingly strident state Chamber of Commerce constantly preach the high-tax myth. The fact is that rather than going up, taxes in the state have been cut by a cumulative $12 billion in the last five years, from the car tax to the exemption for thoroughbred breeding horses. No wonder there’s not enough money to pay for services.

Schwarzenegger may have lost some of his honeymoon stardust with the budget flap, but he remains the most popular governor in recent California history, one with tremendous potential for fixing state government. But Schwarzenegger has little time to do an enormous job. His next budget, due in January, must close the structural deficit.

Perhaps his forthcoming audit of state operations and his governmental reorganization will eliminate large amounts of “waste, fraud and abuse,” as the anti-government forces claim. Certainly there are duplicative and overlapping departments or offices that need to be streamlined, and their goals must be more sharply defined. But it’s unlikely this will provide enough money to solve the structural deficit next year without eliminating entire programs.

Facing Tax Reality

Most important, Schwarzenegger needs to acknowledge the need for a tax increase -- perhaps a temporary restoration of the 10% and 11% income tax brackets on the most wealthy Californians, which Pete Wilson imposed temporarily a decade ago. Had that been done again four years ago, California would not have developed the massive deficit problem that plagues it still. There was no evidence that the increase hurt the economy under then-Gov. Wilson and no sign that it would do so today.

Schwarzenegger should also launch a major effort to reform the entire state and local tax system so that it makes sense in the modern economy. That means giving local government more control of essential revenue sources, as was the case before Proposition 13. Get rid of the two-thirds vote requirement. Broaden the base of the tax system, especially the sales tax, to bring in more revenue while holding rates at current levels or even cutting them.

It is still not too late for our unusual governor to be the superhero of this drama. And he should ask himself: Why not? He proved the doubters wrong by getting elected. He is not eligible to run for president. Straightening out the mess and restoring the dream are the biggest acts of heroism open to him.