The Sacramento Scene. The latest legislation that affects your business.
The Sacramento Scene. The latest legislation that affects your business.
Last year, while facing a staggering budget deficit, the Governor and the Legislature increased taxes by nearly $12 billion, cut state spending by a similar amount, and were forced to furlough state workers, freeze spending on infrastructure projects, and issue IOUs to state contractors.
Unfortunately, little has changed in Sacramento this year.
Lawmakers have already begun budget meetings in an attempt to rein in the latest structural deficit.
However, even if significant mid-year progress is made during the emergency budget session, it will not tackle the entire $20 billion deficit that is projected over the next year and a half.
These actions will simply deal with the short term cash flow issues associated with last year’s budget. The longer-term funding for core services such as public safety, education and health services will remain in a state of uncertainty, and will inevitably be dealt with later in the budget cycle.
Over the past two years, Governor Schwarzenegger and legislators have cut more than $18 billion (nearly 18 percent) from the state’s general fund spending. These cuts have had significant effects on public schools, higher education, and health care, and support services for the state’s disabled population.
Complicating the state’s long term ability to deal with the ongoing deficits is the fact that the temporary tax increases enacted by last year’s budget will begin to expire at the end of the year. Additionally, avenues for Sacramento to extract money from local government entities have largely been exhausted. Both of these factors are threatening to widen the state’s budget deficits in the coming years.
The Democratic leadership of both houses of the Legislature, have already criticized Governor Schwarzenegger’s January budget proposal, and have promised to fight what they consider to be draconian cuts to education and state social services.
Conversely, Republicans have pledged to hold the line against any and all new tax proposals, stating that the $12 billion in tax increases implemented by last year’s budget have had a detrimental effect on taxpayers and the state’s struggling economy.
In reaction to the Republicans’ stance on tax increases, Democrats – as they have during the last two budget cycles – are searching for ways to sidestep the rule that requires a two-thirds vote of the Legislature for tax increases and to pass state budgets.
The dynamics that have led to the staggering deficits are the same as in recent years: state spending on ongoing programs can simply not be covered by its tax revenue, which is heavily dependent on personal income tax and taxes on capital gains. Both of these revenue sources have fallen dramatically as Californians continue to suffer the impact of the national recession.
Furthermore, California already has the lowest credit rating of any state, making it more expensive to borrow money. In fact, the high cost of borrowing led the state treasurer to halt the sale of all state bonds in January.
The state risks further credit downgrades, which would increase the cost of borrowing – particularly the short term cash borrowing – even more.
Ultimately, the solution for California is to fully reform of its budget, taxation and fiscal structure. Furthermore, the state must fundamentally alter the way it conducts business. Years of piecemeal solutions and short term funding gimmicks have not only failed to fix the state’s fiscal problems, but have instead exacerbated them, and led to the creation of a political environment where compromise is perceived as weakness and sacrifice is perceived as loss.
Identifying the problem is quite simple…state spending greatly exceeds revenue. Crafting the solution in a partisan and ideologically divided Legislature has proven far more difficult.
