Author: Joel Fox

From the details we know so far of the proposed budget deal, will it be enough to prevent the California ship of state from meeting disaster? The S.S. California is heading toward an iceberg. The question state legislators, and eventually voters, will have to ask themselves is: Should it be allowed to crash or is the budget deal acceptable?

Some argue it should crash. Then the spending system can be rebuilt anew. But if the ship does crash, many will suffer. Turning the ship in the right direction and away from immediate danger will have a cost as well, a cost we all will pay. And in the case of tax increases, this is no light matter. It will delay recovery and keep us in choppy waters for some time.

But navigating those choppy waters must be played against the destructive force of doing nothing and hitting the iceberg.

The leaks on the budget deal are flowing out of the Capitol, but without a view of the whole package it’s impossible to make intelligent comment on any trade-offs that make up the deal. Numbers were attached to the tax side of the proposal, but without knowing about spending cuts, economic stimulus, or spending restraints we are looking at only one side of the painting.

According to reports, the tax increases are temporary, although there may be one–a 12-cent increase per gallon of gasoline–that could be permanent. Other tax increases reported: The sales tax will increase one-cent, the vehicle license fee will jump from .65% to 1.15%, not back to the 2% level where it stood when Governor Schwarzenegger cut it in 2003, and a surcharge will be placed on income taxes. It is unclear if that increase applies only on taxable income over one-million dollars or to other income taxpayers as well.

None of this is acceptable without counterbalancing methods to restrict spending and juice the economy so we’ll have to see what the whole package looks like. Even without knowing the spending side measures, it is safe to say these tax increases will put a strain on California’s economic activity and attempts to recover.

Concern that hastily implementing clean air laws would hurt small business is playing out over the requirement for gas stations to install Enhanced Vapor Recovery (EVR) systems by April. This issue reflects the bigger problem small business will face in going along with the mandates for AB 32, the state’s landmark environmental measure.

Gas stations, most independently owned, are required by the California Air Resources Board to install equipment by April 1 to prevent a relatively small amount of harmful vapors from escaping into the air. Given the cost of the equipment and the difficulty getting financing in these hard economic times, a number of small retailers find this hurdle impossible to meet.

According to a survey conducted by the South Coast Air Quality Management District, 2.4% of those responding said they would shut down operations rather than try to comply with the mandate. While the Air Resources Board calculates that the cost of compliance can be met by adding .68 cents per gallon of gas, smaller outlets would have a larger burden.

Core elements of California’s budget problem were exposed in the political ploy by labor and environmental groups charging that Republican legislators are offering to trade votes in the budget talks.

The union and environmental groups sent a letter to Attorney General Jerry Brown charging GOP legislators with offering to trade their budget votes for a loosening of labor and environmental laws. Leaders from the California Labor Federation, State Building and Construction Trades Council, Conservation League and Sierra Club say that changes in environmental and labor laws have nothing to do with the budget; therefore, trading a vote on the budget and/or taxes for labor and environmental reforms is illegal.

Revenue government collects from private sector activity has everything to do with the budget and the current budget crisis. Allowing business to grow will produce more revenue. Putting restrictions on business will limit revenue.

Last Friday, I questioned how much emergency power Governor Schwarzenegger might be able to use given the ruling in superior court that backed up his order to furlough state workers twice a month due to the budget crisis, which the court declared an emergency. Using emergency powers to streamline the regulatory process will get projects up and running faster, which is better for the economy.

Now, we hear from three former California governors that using emergency powers and streamlining environmental procedures is a way to help get us out of the fix we’re in. Former governors George Duekmejian, Pete Wilson and Gray Davis published a commentary in the Washington Times yesterday supporting the use of emergency powers to push along projects that they expect will be funded by the president’s stimulus package. You can read the Washington Times piece here.

Now that Super Bowl Sunday is over (congratulations Pittsburgh Steelers on winning the Super Bowl), I wonder if this will be Super Monday when a deal on the budget is announced. Perhaps it will happen tomorrow, making that Super Tuesday. The betting here indicates that a budget deal will be announced soon.

If there is a deal we’ll learn what’s in it, which will set off screeching sirens from one interest group or another dissatisfied with what was given up to bring folks on the other side to the table. In true Super Bowl betting fashion, we could take odds on how the reactions to a budget deal will play out.

Yes, I know it’s a bit premature since we don’t know what’s in the deal, but betting on anything related to the Super Bowl occurs before the kickoff and we can make some good guesses on budget proposals and reactions to them. If the Las Vegas sports books can lay odds on what song Bruce Springsteen will deliver first in the half time show, Fox & Hounds Daily can open up the books on some pre-budget deal bets.

In ruling that Governor Arnold Schwarzenegger has emergency powers to order furloughs for state workers, Sacramento Superior Court Judge Patrick Marlette said, “The current circumstances constitute an emergency.”

With the state teetering on the financial precipice, soon unable to pay bills, the judge apparently equated California’s situation to any natural disaster that might hit the state.

The Governor sees it the same way. Recently, Schwarzenegger said he views our fiscal emergency like he would view an earthquake. It’s a crisis of the moment that demands immediate attention.

Now that we have a judge agreeing that the governor has extraordinary powers to confront this fiscal crisis, the question is: How far can the governor take this emergency power?

The Public Policy Institute of California poll results this morning don’t provide a clear map on leading the state out of the budget wilderness.

While 44% of those polled believe that a combination of taxes and cuts are the remedy for our current budget problem, the kind of taxes voters chose to support will not get us off the long term budget rollercoaster. Corralling the greatest support was the proposal to tax the wealthiest Californians at 69% of likely voters. The trouble with that is the wealthiest Californians already pay the greatest portion of the state income tax. The wealthiest one percent pay fifty percent of the income taxes in the state. Hitting that group of taxpayers up for more will mean California will be even more dependent on the volatility of the marketplace. Relying on the most progressive income tax in the nation already has led us into the fiscal ups and downs we have witnessed over the last decade.

Raising taxes on corporations was approved by 60% of those polled. Given all the lay-offs corporations have made of late this maneuver is contradictory to the voters feelings on the number one concern in the state as indicated by the poll: jobs and the economy. Raising taxes on corporations is sure to send more workers into the unemployment line because the corporations will be paying money to the state instead of paying salaries to workers.

Not often will you see Wall Street CEOs and public employee unions mentioned in the same sentence, but in the recession drama playing out in California and across the United States, they are linked by taxpayers’ dollars.

Wall Street CEOs have been taking taxpayers money so that their companies will survive, and then turning around and paying large bonuses. They’ll tell you they are not using the bailout money for the bonuses, but without the bailout money, there would be no other money to pay the bonuses.

The public employee unions also want taxpayer money to pay their members in full without making concessions during these hard economic times. Three California public employee unions have filed lawsuits charging that Governor Arnold Schwarzenegger cannot furlough workers for two days a month to help the state weather the fiscal storm. As I discussed a couple of weeks ago, another public employee group even called for the Governor’s impeachment over the furlough demand.