We are told that Gray
Davis’ fiscal mismanagement of the state was the primary concern of voters, who
had grown tired of “liberal tax and spend” policies that increased state-spending
by $20 billion. Indeed, Sen. Tom McClintock argued we didn’t have a revenue
problem, just a spending problem. The gap between revenue and spending is indisputable,
but a closer look at the dynamics behind revenue and spending suggest that balancing
First, we should keep
in mind that spending as a percentage of the state’s general fund, currently
$70 billion, grew at a smaller pace during Davis’ first four years than it did during
Gov. Pete Wilson’s first term. What caused the revenue-spending gap was a
combination of four developments reaching critical mass – volatile state income, volatile
sales tax matched by declining contributions
from California’s wealthiest tax payers, Enron-type accounting shifts with the revenue-expenditure base, and political grandstanding – all of which
Arnold Schwarzenegger will have to address if he is going to succeed as
governor.
To understand the
challenges caused by volatile state
income levels, think what would happen if your income increased three times
and then suddenly dropped backed to its original level three years later. This
is what happened in
While Davis, who
understood the short-term nature of the sudden state income boom, originally
wanted to create one-time expenditure boosts, a backlog of spending cuts during
the Wilson years had created a sense that this was the time to institutionalize
increases in the three primary areas that absorbed 92% of new state
expenditures: Health and Social Services (48%), K-12 education (36%), and state
prisons (8%). Forgotten in the recall hoopla is that bi-partisan support was
critical for increasing expenditures in all of these areas.
In the next area – sales tax volatility matched by
declining marginal rates for wealthy tax
payers – imagine what would happen to your fiscal picture if you worked
more hours, were paid more, but the bank did not register or credit your
account. Then imagine what would happen if your rich neighbor suddenly tapped
into your utilities but didn’t have to pay you for it. In essence this is what
happened in the state of
More to the point, while
growth in California’s primary revenue sources from 1990-2002 occurred in personal
incomes (4.9%), taxable sales (3.7%), and assessed valuations (4.8%), receipts
from these primary revenue sources did not grow at similar rates. The reasons
for this are many and complex, but consider what happened once we started
shopping on the internet. The state lost considerable income by not taxing these
and other service oriented transactions. The result?
More economic activity and income but lower real earnings listed or registered.
At the same time this
occurs the amount of taxes paid to state and local
governments has actually declined for
At the same time this
is going on, our legislators played Enron accounting with local revenue sources
by shifting both revenue sources and expenditure loads. To wit, significant
portions of money for local government, which pay for police and fire
departments, flow from our DMV fees. In order to get local governments to support
reducing DMV fees Pete Wilson had to promise that the state would make up the
difference by tapping into the general fund. By 2002 nearly $4 billion from the
general fund was reimbursed to local governments and accounted for almost one-fifth
of increased state spending.
Finally, while
successive state legislatures worked with republican Governor’s Reagan and
Wilson during fiscal crises, the republican minority thought it would be better
to embarrass Governor Davis by failing to give him the 2/3 majority he needed
to pass initial budget packages. More importantly, while calling on Gov. Davis
to be more like his republican predecessors they failed to grant
In sum,
Dr. Mark A. Martinez is an associate professor of American foreign
policy and international relations at California State University, Bakersfield.