A quick-fix budget for California

Like many states, it borrows heavily to fill gaps, putting off future fiscal and political problems.

California's month-long budget impasse was solved only a few days ago, but it has already begun reshaping the political landscape both here and nationwide.

The budget, which largely papers over a financial crisis, is but the latest and most extreme example of an increasingly common trend, as states turn to more gimmicks and quick fixes to survive downturns without raising taxes or cutting services.

For former Gov. Gray Davis, budgets like these incurred the wrath of state voters and led to his recall. For Gov. Arnold Schwarzenegger, who stormed the Capitol vowing to change business as usual, it raises questions about whether his profuse campaign promises have now put him in an impossible situation.

With rumblings that he might soon push for a ballot initiative to limit the legislature's power in redistricting or to make it part time, there are signs that his frustration has reached a new peak.

But it has also underlined the depth of the problems that California now faces - and how difficult it will be to solve them.

"All the hard choices have been put off for another year," says Stephen Levy of the Center for the Continuing Study of the California Economy in Palo Alto. "[The budget] is not worse than it was last year. It's just the same."

Most of the load was taken by borrowing. In March, California voters approved a $15 billion bond to cover deficits left by the Davis years, as well as some of this year's deficit. The rest was mopped up mostly by deals made with interest groups. One, for example, deferred $2 billion in state payments to the education system until later years. Another ticked up the amount of revenue the state collects from casinos.

As a result, no one thinks the budget addresses the larger issue: California annually spends far more money than it takes in. This year was supposed to be Governor Schwarzenegger's best shot for reform, given his high approval rating, early success in the Legislature, and the $15 billion bond, some experts say.

"Sooner or later, a judgment day will be here," says Larry Gerston, a political scientist at San Jose State University. With little room for gimmicks remaining, he adds, "it's hard to imagine that they can go on like this for much longer."

Schwarzenegger, however, is by no means the only politician in this situation. Particularly among the larger states, governors and lawmakers find themselves in precisely the same bind - albeit less dire. And their solutions have been remarkably similar - though perhaps less extreme.

New Jersey, Illinois, and Pennsylvania have turned to heavy borrowing. Pennsylvania is considering slot machines to supplement government income. Dozens of states have raised liquor or cigarette taxes. Add to that the improving economy, and most - if not all - states should recover in the next one to two years.

But the solutions are temporary. Revenue from slot machines and cigarette taxes might help this year, but they aren't likely to grow. So as state healthcare costs skyrocket, these states will again find themselves searching for more money.

It is, in many ways, the states' own fault. In the rush of the 1990s, they seemingly couldn't give enough tax breaks. By itself, California gave back more than $7 billion during the boom. If it hadn't, the budget crisis would be all but solved. Even now, Pennsylvania is considering using the slot-machine money as a way to give a property-tax break.

"It's sound financial government that I'm worried about," says William Fox, an economist at the University of Tennessee in Knoxville. "There is a tendency to whittle away at the tax base."

In recent years, sound financial policy has lost out to old-fashioned politics. Since the Republican Revolution of 1994 swept in its antitax credo, taxes have been political suicide. In the recession of the early 1980s, 33 states raised sales taxes. In the early 1990s, 22 did. In this round, though it was a "much worse fiscal environment," only about a dozen raised sales taxes, according to Dr. Fox.

"The people who are running states now are there because they beat the people who raised taxes," says Nicholas Jenny of the Rockefeller Institute of Government in Albany, N.Y. "So there is a particular sensitivity."

For his part, Schwarzenegger pledged not to raise taxes, and his first act as governor was to overturn a $4 billion car tax signed by former Governor Davis. Now, looking at next year's $10 billion shortfall and two houses of lawmakers who seemingly can't agree on the color of grass - much less raising taxes or cutting services - his trump card could be a gambit worthy of Guy Fawkes: to essentially blow up the Legislature.

If he does turn to the ballot box to curb the power of the most professionalized state legislature in America, says Dr. Gerston, "It will be the mother of all initiatives."

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