California: With Both Sides Pushing Bad Ideas, Budget Talks Go Nowhere

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Today marks the 53rd day of the new fiscal year in which California is operating without a budget. With the state $15.2 billion in the hole, all sides concede that the budget gap cannot be filled with spending cuts alone. Unfortunately, the debate has devolved significantly from where we thought it might have been headed back in June. A proposal to expand the sales tax base to include the state's growing service sector has been defeated, and a proposal to increase income tax rates on wealthy Californians has just been defeated by a vote of 45-30.

The new sides of the debate are as follows. Republicans have flatly rejected the idea of increasing any taxes, a fact central to the nearly two months of gridlock that has gripped the state. Instead, they support borrowing money and cutting spending to fix the budget gap. Governor Schwarzenegger has called such a solution a "get-out-of-town budget" that simply "kicks the can down the road and lets someone else worry about it later on".

Curiously, then, the Governor's proposal combines spending cuts with a temporary sales tax hike that would last three years, after which point the rate would be lowered 0.25 percentage points below the current rate. But like the Republicans' plan, a temporary tax hike followed by a tax cut certainly seems to leave a problem for "someone else to worry about later on". Since the Democrats' plan to hike income tax rates on the wealthy has been soundly defeated, it seems that their support may shift in favor of the sales tax hike as the next best option. In order to gain passage, however, a handful of Republicans will also have to back the plan -- a prospect that, at the moment, seems pretty dim.

Aside from the problem of how to fix this year's budget, the other major hang-up has been over what measures should be taken to prevent future shortfalls. Republicans have proposed a strict spending cap that only allows revenues to grow at a rate consistent with growth in population and the inflation rate. Such caps always amount to an unrealistic restraint on government since the cost of health care, education, corrections facilities, and various other state services often grow faster than population or inflation. Fortunately, Democrats have rejected this plan. As a substitute, the Governor has proposed that excess tax revenue in strong-growth years be tucked away into a rainy day fund, rather than spent. That fund would be allowed to grow to as much as 12.5% of the state's budget.

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