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Press Release

California Dreamin’

06/11/2003

While California is often an example of what not to do, they do have one law that is particularly worthy of envy: a 2/3 supermajority vote is required to raise taxes.

The requirement is especially important this year, as California struggles with massive budget deficit of $38.2 billion—the legacy of an incredible run-up in spending in the late 1990s. The requirement of a 2/3rds supermajority by the California Constitution protects state taxpayers from government’s natural instinct to raise taxes instead of cut waste and extravagant spending.

Although the Democrats, led by Governor Gray Davis, would like to increase taxes in order to cover the government shortfall, they cannot because they do not have the required supermajority of votes to enact a tax increase. Without the supermajority, Californians would be in for some large and unpleasant tax hikes. Indeed, the Governor is proposing a budget that combines $18 billion in needed spending cuts with $8 billion in tax increases. The remainder of the deficit is to be financed with loans over a period of five or more years. Davis needs eight Republicans to cross over the aisle in order to engorge the government with more funds.

Fortunately, California Republicans are a fairly principled minority. They have so far refused to pass any budget that includes tax increases. They will not ask their constituents for more money to pay for years of mismanagement of the state’s finances. Some of them have even begun a well-funded movement to recall the Governor from office! (Which might create an opening for Arnold Schwarzenegger to run for the position)

The recall movement has the right target. As the numbers show, the blame for California’s troubles can be placed squarely at the feet of Davis and his big spending supporters. In 1998 California had a budget surplus of $12 billion. Most of this surplus was accrued through the revenues from the huge 1990’s stock bubble and hyper- investment in Silicon Valley.

Of course, surging revenues meant surging spending. Instead, this boom money was used to hire new state employees and to give pay raises. These are structural cost increases that are difficult and painful to repeal when the funds run out, as they have now. Instead of growing government, this windfall should have been returned to state taxpayers. Had it managed the spike in revenues properly, the state would not be staring at such a large deficit.

Davis and his supporters are guilty of fiscal mismanagement and are unable to control their spending. According to Reason Public Policy Institute in California, from 1998 to 2002, state revenues increased by a healthy 28%. However, politicians increased expenditures by 36%. They saw the money rolling in and served themselves a heap of pork for dinner. However, even as spending stepped up, the money was not always used effectively. In the same four-year span, government spending on education increased 64%, but the state’s educational ranking on standardized tests did not improve even one place. This is not a good return on investment.

Not only were many of the increases in state spending ineffectual, but there was also a significant amount wasted or stolen. A comprehensive study by the California tax watchdog group CalTax identified nearly $10 billion in fraud and squandered money. This $10 billion leaves out a number of cases where fraud or waste was likely but could not be definitively proven or where an exact amount could not be agreed upon. If the California government could keep a closer eye on its books, the elimination of fraud and waste would be more than enough to offset the “need” for the proposed tax increases. Taxpayers should be extremely wary of a government that cannot keep track of their money but is continually asking for more.

Given the Davis administration’s inability to control spending, watch the books, or identify useful areas for additional spending cuts, California taxpayers should not be asked to pony up more money to pay for the Davis deficit. Furthermore, why is it only now, on the eve of a budget meltdown that Davis can find $18 billion in nonessential state expenses to cut? Why wasn’t this spending eliminated in early 2002, when it was clear California was headed off the cliff?

Clearly when the government has been spending $18 billion on marginal programs and $10 billion on fraud and waste, new taxes are not the answer. Before turning to the taxpayers, government should turn to itself to see if it can rectify its own past mistakes. Californians should cheer that a previous generation saw it fit to protect them from this kind of reckless mismanagement with the supermajority requirement to raise taxes. It is forcing spineless politicians to make tough choices about priorities instead of simply hitting taxpayers for more and more. There’s not a lot to admire in the California state government at the moment, but the supermajority requirement is something we all can love.