Short Term Pain Versus Long Term Gain

Joel Fox
Editor and Co-Publisher of Fox and Hounds Daily

Proposition 1A on the May 19 special election ballot will create a spending limit and a rainy day fund to even out the ups and downs of the budget and restrain spending. But, it is important to note, if the measure passes, the temporary tax increases approved by the legislature and signed by the governor will remain in effect for four years instead of two years.

A difficult choice is presented to the electorate. Is establishing a long term spending limit worth accepting the temporary taxes for an additional two years? I believe the answer is yes.

I do not reach this conclusion casually. The decision is the product of both analysis and history.

First, the history.

I was co-chairman of the reform campaign on the 2005 special election ballot. We worked hard to both establish a spending limit and curb the influence of public employee unions by giving more power to the rank and file members of the unions. While the defeat of these measures was frustrating, one particular disappointment was that expected allies criticized the spending limit, feeling it was not good enough. To use a cliché, they allowed the perfect to be the enemy of the good and gave the measure little support. So, in the end, we got no spending limit, spending increased and we continued to hear criticism about out-of-control spending.

Because we were unsuccessful in changing business-as-usual in Sacramento, the spending lobby pushed the state to the brink of insolvency. To deal with the fiscal crisis, tax increases were included in the budget package along with another chance to establish a spending limit.

To determine if this spending limit works over the long term for the taxpayers we have to look backward since we do not know what the future holds.

The spending limit takes away the surges in good years and puts money aside for rainy days. For example, the 1998-99 general fund spending budget was $57.8 billion. In 1999-2000 it increased to $66.5 billion, a 15% increase. If this spending limit were in place $5 billion would have been set aside in ’98-’99 (and another $13 billion the next year) for the rainy day reserve fund, rebates, bond repayments or other one-time uses instead of being spent on on-going appropriations.

Under the limit, when revenue falls off, a hard cap comes into play for that budget year. If the state can’t meet the current service level in the budget it can take from the reserve only enough to cover the current service level plus population and CPI growth.

California is in the bottom of the recession, which is a good time to put a limit in place. We will undoubtedly have high growth years in the future, but setting a cap that includes the recession year means that we will have a tighter limit in place in high growth years. The cap will even be tighter if the taxes increased in the budget deal do not bring in all the revenue projected, which I believe will be the case.

If this spending limit were in place over the last ten years we would now have a $9 billion reserve and would have had $33.4 billion in excess revenue above the reserve over the ten year period, which could be used for tax rebates or bond payment or other one time payments. Reducing the state’s debt will bring further advantages such as a better credit rating for the state and more money in the general fund to spend on government services negating a need to raise taxes.

This year’s deficit of $39.1 billion would have been $14.4 billion instead if this limit plan were in place. With a reserve of $9 billion to apply to that deficit, the shortfall would have been $5.4 billion, which unlikely would have led to tax increases.

Speaking of tax increases; it is true that the limit can be lifted to accommodate any tax increase that passes. But the historical truth is that major tax increases have occurred at times of budget distress. Such times will be less likely if this spending cap is in place. The rainy day fund will offset deficits meaning there will be much less pressure for tax increases.

Across the board tax increases have occurred rarely. The last one was 17 years ago. If a spending limit is in place it will work to the benefit of the taxpayers over the many years between tax increases, and as stated above, will likely prevent the need for tax increases.

While continuing the tax increases for an extra two years is a troubling proposition, at least these taxes established during the fiscal crisis are temporary. I took a similar position on temporary taxes during a previous budget crisis. In a 1991 Los Angeles Times opinion piece, I wrote: "When the budget emergency ends, any tax increase passed to deal with the problem must also expire."

The general fund budget would have been $95 billion in 2007-08 under this limit instead of $103.3 billion.  When the first budget affected by the spending limit is written in 2011-12, the revenue trend line used as a cap likely will be about 3%. Compare that to the yearly spending increase from the decade of 1997-98 to 2007-08 of 6.9%.

When taxes are reduced, that action will boost the economy and eventually bring in more revenue. It will be wise to have a spending limit in place when that occurs.

If Prop 1A is defeated there is no spending control in place and the new taxes we will pay over the next two years will have bought us nothing in major reform. For all these reasons I think Proposition1A should pass.

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