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But Is It Good for This State? : Delegation will have to fight harder than ever

California Watch / One in an occasional series.

August 07, 1993

President Clinton has got his first budget. No doubt it's a political victory, if perhaps a Pyrrhic one. But is the controversial plan to cut the nation's deficit by $496 billion over five years an economic victory for California?

THE MINUSES: At best this compromise budget presents a trade-off of California interests for an overriding national interest--beginning to get a handle on the deficit. But for California, whose economy is equivalent to the eighth-largest national economy in the world, the timing could not be worse. It's hard to believe that higher taxes, limited to upper-income taxpayers though they may be, and continuing defense cuts will do anything but drag down struggling California.

The big hit will be on Americans earning more than $200,000 a year--taxpayers who exist in far higher concentrations in California (and especially in Southern California) but account for only 1% of the state's tax returns. Higher taxes on the affluent will siphon millions of dollars out of California.

In the middle class, the average California motorist will spend about $31 a year more because of the new tax on gasoline.

THE PLUSES: That said, the Clinton budget presents some opportunities. Economic incentives in the package may help revive California industries and small businesses.

However, a big unknown is whether low interest rates will, as the Clinton Administration continually claims, boost investment, jobs and economic growth. Right now, around here anyway, uncertain employment prospects and the continuing decline in property values are pummeling consumer confidence.

Sen. Dianne Feinstein (D-Calif.), to her credit, shrewdly held out for state interests, helping broker four programs that ought to help California business: the permanent tax credits for entrepreneurial firms that engage in research and development; a targeted capital gains tax break of 50% for investments in small business that are held at least five years; elimination of a 10% surtax on capital gains and a $3.5-billion enterprise zone program to stimulate investment in urban areas like South Los Angeles.

Another positive aspect of the budget for California is the expansion of the earned income tax credit for low-wage earners. This will mean $3.7 billion more in their pockets.

THE GOAL: The real challenge is yet to come, with calls for greater spending cuts. Under the Clinton budget, California will pay about 15.5% of the deficit reduction costs, while it gets only 13% back from the federal government. This asymmetry needs correction, particularly since California is in the worst recession since the Great Depression. It is up to the huge California delegation to fight to meld state interests with the national interest. One thing is sure: Without a California recovery, a national one will be stymied.

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