ShareThisThe political Sturm und Drang over billions of dollars in spending cuts, new taxes and borrowing to close a huge budget deficit masks the most important question: Would it resolve, even partially, California's chronic fiscal malaise?
The answer is elusive because the package has many moving parts and is based on many assumptions. But in general, it's not a full solution.
There's certainly no guarantee that all of those parts would perform as projected, even in the short run, because no one knows how far the economy will fall.
When the state faced a similar situation in the early 1990s, then-Gov. Pete Wilson and legislators took a similar approach, only to see the new taxes fail to generate the projected revenues and service demands soar as the economy continued to spiral downward, creating new deficits.
Some critics contend that $14.4 billion in new taxes would themselves deepen the recession. However, they would represent much less than 1 percent of Californians' personal income over the next 17 months, and the money they would raise would continue to circulate in the economy.
Even were the revenues and spending cuts to meet projections, however, their effect would be short-lived. All of the new taxes and many of the cuts are temporary, not to mention the $20 billion in borrowing and one-time federal aid.
The temporary nature implies that the economy will recover quickly, but even a fairly rapid recovery would leave what fiscal experts call the "structural deficit" intact. As the recent past indicates, California runs budget deficits even when the economy is humming because the state's spending commitments, year in and year out, add up to more than the state's revenue system can consistently produce.
Closing the structural deficit would require permanent reductions in the level of state spending and/or permanent new revenues, as well as new mechanisms to smooth out the boom-and-bust nature of the state's budget process.
The package contains one potential smoother -- Gov. Arnold Schwarzenegger's long-sought spending limit, based on a rolling average of the previous decade's revenue increases with any year's excess revenues going into a reserve that could be tapped when revenues decline. If approved by voters, it could both hold down excessive spending during revenue spikes and provide a cushion during revenue crashes.
A second smoother would be altering the mix of taxes to reduce dependence on volatile personal income taxes -- by applying the sales tax to services, for instance -- so that the state has a more predictable revenue stream. A commission appointed by Schwarzenegger and legislative leaders is working on tax reform with recommendations due in April.
Those two steps, if taken, could be far more important to California's fiscal health than the temporary taxes and spending cuts that have generated political angst.
(E-mail Dan Walters at dwalters(at)sacbee.com. Back columns, www.sacbee.com/walters. Distributed by Scripps Howard News Service, www.scrippsnews.com.)
Column. Must credit Sacramento Bee
