Any level of government facing budget deficits has two options -- cut spending or raise revenue. However, when one of those options remains off the table every year, it makes the difficult job of adopting a budget nearly impossible, as we have seen.
While Gov. Arnold Schwarzenegger and Republicans like to call our perennial budget deficit a spending problem, this does not reflect what has actually happened with our state budget.First, over the past 10 years, which is roughly when the current boom-and-bust cycles began, there is no doubt that overall state spending has significantly increased. In fact, from 1998-99 to 2008-09, it is expected that overall state spending will grow by $56 billion -- an average annual increase of 6%. However, once inflation (the same level of services cost more) and population growth (more people to serve) are factored in, spending will grow about 2% a year, which does not exactly seem like a government gone wild with the checkbook. Nevertheless, when budgets are tight and even when they are not, spending should be carefully scrutinized to reduce waste and prioritize scarce resources.Second, what Republicans often fail to mention is that tax cuts have been adopted that reduced total state revenue. Ironically, in budget speak, these tax loopholes are called tax expenditure programs (TEPs), which means they are also part of the "spending problem." The most notable of these TEPs is the vehicle-license fee, better known as the car tax, which costs state revenue about $6 billion annually. One of the most egregious of these is the "yacht tax," where rich folks avoid sales taxes (about $21 million annually) by sheltering their new boats outside of the state for 90 days after purchase. Now I should point out that I am not some tax-and-spend liberal academic advocating for tax increases across the board, although you may have already reached that conclusion. Instead, I am a registered independent who wants to see major problems analyzed properly and solved. In this particular case, that would include recognizing that our state budget is a spending-and-revenue problem.What I hope to add to the budget discussion about tax increases is a little context, since conversations usually stop before any rational analysis begins.One common complaint about taxes is that they are too high, which begs the question: How do you know?One way to get an idea is to look at our tax burden compared with other states. Based on this criterion, we are ranked 13th in the nation, as state and local government collect about $4,055 per person. Among similar-sized states, we pay less than New York ($5,752), but more than Illinois ($3,849) and Florida ($3,369). As a share of personal income, the tax burden in California drops to 18th in the nation.While California is above the national average in both instances, we are not among the top 10. Moreover, these rankings do not consider that the cost of living in California is much higher than other states.Another frequent criticism of tax increases is that higher taxes hurt the economy. Almost all economists agree that high tax rates can stifle economic growth, but revenue increases can be targeted so they have little effect on economic behavior. One need only examine the unprecedented growth in our national economy from 1994-2000 after President Clinton passed gas- and income-tax increases in 1993. The point is that tax increases do not automatically translate into lower economic growth. State Republicans also like to mention that when Republican Gov. Pete Wilson and the Legislature raised taxes in 1991, state revenues declined for two years after. The problem with this argument is twofold. First, in an economic downturn, revenues are going to decline regardless of tax changes. Second, Republicans fail to mention that after those two initial years of decline, state revenues rose for the next two years at the historically average rate of around 6%, even with higher tax rates in effect. Obviously, nobody likes to pay higher taxes. However, there are times when they should at least be considered and analyzed, particularly when state legislators from both parties are not eager to reduce spending on prisons or education, and with good reason.The ironic element to Republican opposition to tax increases is that their standard-bearer, Ronald Reagan, raised taxes as both governor and president. If Republicans wish to emulate their idol, then perhaps they should start by reflecting his pragmatism and political courage. After all, in the absence of redistricting reform, their chances of re-election are still pretty high.