Governor Schwarzenegger is right to demand that the legislature deal with the entire $24 billion shortfall. Why? Because the budget crisis we face now is itself product of previous budget deals that didn’t solve the whole problem.
The examples are immediate. Even before the ink was dry on February’s deal, the state had another $8 billion shortfall. With the voters’ rejection of some $6 billion in budget solutions and the continued decline in revenues, that shortfall has grown to today’s shortfall. And last fall’s budget was out of balance nearly as soon as it’s signed.
It’s possible that even a budget package that gets to $24 billion may not be enough if the economy remains in the toilet. So the governor needs to take a hard line—he should not accept a budget that doesn’t have $24 billion in solutions. He should avoid accounting tricks and gimmicks, including some of the ones he himself has proposed. And he should not hesitate to hold out deep into the summer, even if it means that the state must send out IOUs and see a further reduction in its credit rating. California survived both in the early 90s.
And we have the freedom of people who are already broke and are out of options. At this point, getting a real budget solution is perhaps the only way that we’ll be able to pay off those IOUs (when they come due in October) and restore that credit rating (though finding a way to send money to the credit agencies might help us more, if the recent history of the credit agencies, which seem very kind to companies that do business with them, is any guide).
But – and this is a big but – he should be open to the idea of targeted taxes as part of getting to a real $24 billion in solutions. The verdict of voters was not as anti-tax as the governor or other politicians have claimed. Tax hikes on tobacco, severance and alcohol are all very legitimate. The fact that this state doesn’t have a severance tax is a scandal.
In embracing some tax increases, Schwarzenegger needs to remind Democrats and voters that such taxes provide only a small fraction of the budget solutions needed. The real problem with the Democratic budget package isn’t that it raises some of these taxes. It’s that even with these taxes, it doesn’t come close to the $24 billion in budget solutions needed.
I continue to believe, despite the protestations of the Obama administration and Congress, that part of the solution to the current cash and budget crisis will include federal assistance. (And not just for California—a half-dozen other states, most notably Arizona, are in danger of governmental meltdown and need help too). It will be far easier to make the case for federal assistance if the legislature and governor go all the way to $24 billion in cuts and taxes. Yes, those cuts and taxes will be pain. But the pain must be severe to boost our case for the federal aid the state needs and deserves.