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A Balanced Budget Takes Backbone

December 13, 2002|Jean Ross | Jean Ross is the executive director of the California Budget Project, a Sacramento-based nonprofit policy group. Web site: www.cbp.org.

California faces a crisis of unprecedented magnitude, with estimates of a budget shortfall as high as $30 billion, equivalent to one-third of this year's total state spending. But to balance the budget solely through spending cuts, as some have proposed, would require virtually shutting down state government -- and that would still not be enough.

California's crisis, like those of some other states, stems primarily from two factors. First, California's tax revenues have dropped precipitously because of the downturn in the economy and, in particular, the slump in the stock market and accompanying drop in investment- related income. The state expects to collect $37 billion in personal income taxes this year, compared with $45 billion just two years ago.

Second, though spending increased when the economic boom filled state tax coffers during the late 1990s, lawmakers enacted substantial tax cuts. The tax cuts of the last decade will reduce this year's state tax collections by more than $7 billion. Pointing to spending increases during the boom of the late 1990s, some Republican lawmakers have suggested that the budget can be balanced solely by reducing spending. However, these same individuals refuse to identify what and how much ought to be cut.

That may be because most of the increases went to programs and priorities that voters value most. New spending included increasing aid to local school districts for efforts such as class size reduction; expanding financial aid programs to bring a college education within the reach of every graduating high school senior; and extending affordable health coverage to children in low-income working families.

Balancing the budget with only spending cuts, however, is a mathematical impossibility, short of eviscerating the basic functions of state and local governments.

For example, shutting down the state prison system along with the other state departments and agencies, as well as eliminating the University of California and State University system, would save far less than the projected spending gap. Put another way, the gap is larger than the total amount the state spends on health and social service programs.

How should the budget be balanced? In 1991, when faced with a crisis of similar magnitude, then-Gov. Pete Wilson made the politically courageous decision to bridge half of the deficit through spending reductions and half through tax increases. The current crisis calls for similar courage.

Proposals released earlier this month by Gov. Gray Davis address less than half the gap and would take a deep toll on families and cripple the gains made by the public schools. The proposed $1.5-billion cut in funds for K-2 education translates into a reduction of roughly $257 per student, dropping the state's standing in the national rankings from 29th to 37th. Another proposal would deny health coverage to 293,000 working parents with incomes below the poverty level. Still another would eliminate child-care assistance for up to 55,000 children whose parents have successfully moved from welfare to work. Some of these families would undoubtedly be forced back onto the welfare rolls.

Options for raising revenue include reinstating higher tax rates on the highest-earning taxpayers, a choice made by former Govs. Wilson and Ronald Reagan when faced with daunting spending gaps; modernizing the state's sales tax to capture the rising share of economic activity in the service sector and through Internet and mail order sales; and removing the preferential tax treatment enjoyed by long-term business property owners compared with new businesses.

Misguided policy choices run the risk of permanently damaging the elements of communities -- from education to health care to infrastructure -- that are basic to a healthy economy and a decent standard of living. Policymakers should adopt a balanced solution to the crisis: prudent spending coupled with revenue increases to ensure continued investment in quality public services.

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