Well, here we go again. Having just “closed” an estimated $42 billion budget deficit in February through a combination of spending cuts and tax hikes, the state of California now faces an additional $8 billion deficit for fiscal year 2009-10, as projected by the Legislative Analyst’s Office.
While no one is entirely surprised by the continued deterioration in the state’s fiscal position, Californians should be disturbed by the magnitude of the ongoing problem. Losing so much revenue in such a short timeframe illustrates just how detrimental state government has been to California’s economic prosperity.
In short, prior to last month’s (partial) budget fix, state government was living a whopping 33% above its means.
Here’s some context: The $50 billion deficit spans two fiscal years (2008-09 and 2009-10), translating to an average shortfall of about $25 billion a year. With annual general fund expenditures now hovering around $100 billion, the deficit suggests that California’s budget should be sized at a more reasonable level of $75 billion a year.
Now, some might argue that California state government is presently sized appropriately – or even smaller than necessary – to serve a state as large and diverse as ours. They might suggest that California is simply an unfortunate victim of the severe national, now global, economic crisis, and that the magnitude of California’s current deficit is expected given the severity of the crisis.
But such assertions would be misleading.
Consider the following: Most economists now agree that the United States as a whole entered the current recession over a year ago, back in December of 2007. But, interestingly, not all states experienced this same fate. According to Moody’s, six states actually managed to avoid slipping into recession as late as January 2009. They are Alaska, North Dakota, Oklahoma, South Dakota, Texas, and Wyoming.
By contrast, Moody’s analysis suggests that California’s recession began in March 2007.
How is it that California, a state with such an abundance of human and natural resources, a diversity of industrial and agricultural sectors, and strengths in research and innovation, is not among this list of survivors? Why does California now suffer from continuing negative economic growth, unemployment rates poised to reach 11.9% by the middle of next year, and the lowest bond ratings in the nation?
The six survivor states offer a clue. To be sure, there are a number of differences between California and the survivors that could be cited to account for their divergent fortunes, but one jumps out immediately: California is a high tax state.
According to the State Business Tax Climate Index compiled by the Tax Foundation, California ranks 48th out of 50 states in 2009. (And this index was calculated prior to February’s budget deal.) By contrast, the six survivor states have some of the most favorable tax climates in the nation – Wyoming (1), South Dakota (2), Alaska (4), Texas (7), Oklahoma (18), and North Dakota (30).
And California is headed in the wrong direction. It was ranked 46th back in 2006.
As Gov. Schwarzenegger and the Legislature begin to address California’s ongoing deficits, one can hope that they avoid (additional) tax increases and finally focus on ways to make California’s economy more robust over the long term. Continuing to burden the state’s overburdened economy is simply not the answer.