GOP assertion that Wilson tax hike hurt economy doesn’t hold up
Republicans always use it as ammo in tax fights: The claim that Gov. Pete Wilson’s tax increases in 1991 backfired.
Raising taxes prolonged the national recession in California and wound up depressing state revenue. At least that’s what Republican lawmakers tell themselves and their antitax rooters.
The facts tell a different story. They point to the recession lingering longer in California because this state was especially hard hit by cutbacks in military aircraft production and by base closures.
It was our share of the peace dividend after winning the Cold War. America didn’t need to spend so much anymore on military armaments. And much of it had been spent in California, particularly when Californian Ronald Reagan was president.
Republican Wilson’s tax increases didn’t reap as much revenue as had been projected. But they netted a lot more than Sacramento would have collected without the hikes.
I thought of this Wednesday as somber Schwarzenegger administration officials outlined the depressing lowlights of the governor’s proposed budget for the fiscal year that begins July 1.
Actually, the governor and Legislature haven’t even balanced the current $104-billion general fund budget. It’ll be about $15 billion short on revenue by the end of the fiscal year unless the governor and Legislature get their acts together. Add that to the projected red ink for 2009-2010 and it totals nearly $42 billion over the next 18 months.
State Finance Director Mike Genest announced the governor’s solution: $17.4 billion in spending cuts and $14.3 billion in tax increases. Also, borrow $5 billion against future lottery earnings, issue $4.7 billion worth of IOUs and borrow $360 million internally.
The spending cuts -- on top of $11 billion in 2008 -- would include shortening the K-12 school year by a week and paring state government by 10%.
The biggest tax increase would be on sales: 1 1/2 cents on the dollar. In addition, the sales tax would be extended to vehicle and furniture repairs, veterinary services, amusement parks, sporting events and golf.
Also, the income tax credit for dependent children would be reduced to $103 from $309, same as it is for the single tax filer. That kiddie credit is a relic of a decade ago when state government was rolling in money and politicians stumbled all over themselves to spend it all, either on new programs or tax cuts.
But today, Genest told reporters, “we are facing . . . probably the most challenging budget situation the state has ever faced.”
This may be the deepest recession since the Great Depression. But Wilson faced worse budget numbers, relatively. His projected deficit 18 years ago was $14 billion, based on a $43-billion general fund. That’s a hole one-third the size of the pie, compared with roughly one-seventh now.
Wilson raised taxes by a then-staggering $7 billion -- on income, sales, cars, liquor, even candy and bottled water. And he cut spending, borrowed and used accounting tricks to mop up the remaining red ink. Today, the politicians are almost borrowed to the max and out of gimmicks.
Wilson was hanged in effigy at his party’s state convention.
Last winter, I asked the former governor if he had any regrets about raising taxes.
“Sure,” he answered. “I regretted it at the time. I hated it. What I hated even worse -- what I thought was even more pernicious than raising taxes -- was deficit spending. I’d just come from eight years [as a U.S. senator] watching the federal government engage in deficit spending. It is the ultimate slippery slope.”
The Republican added: “The predictable outcome was that it worsened the business climate. But deficit spending is even worse.”
What a concept: Making ends meet. Actually, it’s required by the state Constitution.
In contrast to Schwarzenegger, the feisty, politically astute Wilson had some Republican allies in the Legislature -- enough to muster the required two-thirds majority vote for a tax increase.
The year after, general fund revenue came up $4.3 billion short of projections. But revenue also fell short by $4.7 billion the year before taxes were raised, according to the state Department of Finance. It was the economy depressing tax revenue, not the rates.
Long before the Wilson tax hikes in July 1991, unemployment had become epidemic. Roughly 185,000 nonfarm civilian jobs were lost in the preceding 12 months. Another 326,000 would disappear in the next 22 months before the economy began rebounding, according to the finance department.
Republicans “would have to claim that raising state taxes caused Congress to cut defense spending four years in a row” to make their case that Wilson prolonged the recession, says Steve Levy, executive director of the Center for the Continuing Study of the California Economy. “The base closing commission probably didn’t pick our bases because of state tax rates.”
Jack Kyser, founder of the Kyser Center for Economic Research and former chief economist for the Los Angeles County Economic Development Corporation, recalls that “the recession lasted nationally 18 months. In California, the pain continued because we were going through a major economic restructuring, with a significant downsizing in aerospace.”
Genest was asked at the budget unveiling to respond to GOP chants that a recession is the worst time to raise taxes. Everybody agrees, he replied, but “we have a responsibility to run the government. . . .
“The reality is the [deficit] problem is so large that every single tool that we can use is going to have to be brought to bear, and that does include tax increases. And it is extremely unfortunate that it means increasing taxes during a recession.
“We shouldn’t overstate the impact of that, however. The amount of tax increases that the governor is proposing is relatively small in the overall context of the economy.”
That sounds almost Wilsonesque.