California budget impasse: not over 'til it's over

Schwarzenegger vows to veto the deal lawmakers approved Tuesday, extending the longest fiscal standoff in state history.

The budget deal that California lawmakers had hoped would end the longest fiscal standoff in state history hit a big obstacle late Tuesday: a governor who says they’ve merely kicked all the problems down the road to next year.

Gov. Arnold Schwarzenegger (R) has a big veto pen – and he’s waving it now. Legislative leaders, for their part, are expected to attempt an override, counting on Republican members to stick with the budget compromise because it does not include an explicit tax increase.

Indeed, if there’s any lesson from California’s 11 weeks of budget stalemate, it’s that antitax sentiment is alive and well. The deal that political leaders struck to close a $15.2 billion deficit allowed GOP lawmakers to hold firm to a no tax hike pledge – even as Governor Schwarzenegger and his business allies were signaling support for a temporary sales tax increase.

Instead, the deal cut $9.6 billion in spending, then moved future revenues forward and delayed payments on obligations so as to appear to balance this budget.

The plan “takes our problems and makes them even worse,” Schwarzenegger said Tuesday, in announcing he would veto the budget legislation. “The way this budget is right now, we will need a huge tax increase next year or to cut education severely.” (Education spending accounts for about half of the general fund budget.)

The governor also did not get all the "rainy day" provisions he requested as a way to buffer the state from future shortfalls.

The battle signals that more than three decades after the opening salvos of the Reagan Revolution, this state still has a lot of antitax moxie. The cohesion of the Republican resistance means California has probably reached its high-water mark on taxation for the foreseeable future.

"It shows there's absolutely no support out there for a tax increase," says Tony Quinn, a veteran Sacramento political analyst. Republican lawmakers "would have held out to December if they had to, because there was no critical pressure to get the budget done by raising taxes."

Nor, given the recent past, are new taxes likely in the near future, he says. In 2004, voters rejected stripping the supermajority requirement for passing state budgets that gives Republicans a virtual veto. Then voters rejected further taxes on the rich and tobacco and oil companies.

"That's in liberal California. If they won't tax the rich, Big Oil, or tobacco companies, who will they tax?" asks Mr. Quinn.

Californians are in a show-me mood when it comes to taxation, argues Mark Baldassare, pollster and head of the Public Policy Institute of California.

"I think they are doubtful that there really is a need for new taxes to close a budget gap," he says. "If they are asked to raise taxes for specific road projects, or a local school project, where it's going to affect them directly and they can see it's tangible, I think many voters will be open to that."

Defenders of raising more state revenues say voters are about to see what $9.6 billion in cuts looks like.

"They are cuts that will touch every Californian," says Jean Ross, executive director of the California Budget Project, a left-leaning budget analysis center. "These are deep cuts to education, deep cuts to healthcare, deep cuts to social service programs, deep cuts to public transit."

Some of the biggest whacks include $2.9 billion in K-12 and community college funding and $542 million in public assistance for low-income families, the elderly, and the blind.

While many Republicans argue the state is profligate, California actually ranked 21st in the nation in terms of per capita government spending at the state level in the 2006-07 budget year. That's according to calculations by the Kaiser Family Foundation using data from the National Association of State Budget Officers.

Even that comparison may overstate California's spending, says Ms. Ross. The cost of living here is higher, and with Proposition 13 restricting the growth of property taxes, the state must shoulder many local service burdens, too.

But spending during the five years since Schwarzenegger took office has gone up 30 percent, says Quinn, and people don't feel they've gotten much for the money. "I think the public's view is [government] could do the job much more efficiently, and maybe we'll get a little more of that" with these cuts.

A couple of stopgap measures promises to exacerbate shortfalls and revenue volatility in future years, according to Lenny Goldberg with the California Tax Reform Association.

The deal freezes for two years the ability of corporations to write off future losses and claim certain tax credits. In exchange, they will get the future ability to transfer tax credits among affiliated corporations and write off past losses. That could mean more than $500 million a year in lost revenue for California.

"These new loopholes will effectively mean the death of the corporation tax as an effective revenue-raiser – and does not even receive any real revenues in return," said Mr. Goldberg.

Wire material was used in this report.

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