California's Budget Problems Should Bother You Too

California has hit bottom: the worst credit rating of any state, tied for dead last with Louisiana. Which is kind of ironic, if you consider those current CA residents that fled a different disaster in New Orleans.

California has the 7th largest economy in the world, meaning a potential default could impact even those in the other 49. The state's annual budget is $145 billion, having ballooned from $100 billion when Schwarzenegger took office.

Tuesday evening, the Governator vetoed a Democratic package of $18 billion in tax increases and spending reductions. This bill would have addressed the first part of needed budget reform. Jim Miller of the Inland Empire Press-Enterprise gives a great summary of the issues:

Schwarzenegger complained that the plan failed to include any of what he called his "economic stimulus" proposals, such as exempting several highway projects from the state's environmental review law. The change, he said, would have sped up construction and produced new jobs amid the economic downturn.

Schwarzenegger's fellow Republicans mostly back his ideas but want to go further. The GOP's budget-linked demands include postponing the implementation of the state law to reduce greenhouse gases. Republicans also want to repeal a law that makes illegal immigrants eligible for in-state tuition at public universities.

Schwarzenegger also seeks 1.5% "temporary" increase in sales taxes. How did the Libertarian Arnold turn to a tax and spend politician? Matt Welch over at Reason does a good job explaining what Arnold has become. My question is "why Arnold, why?" The simple answer is that Arnold is raising taxes because it is the only alternative. Cutting spending is politically incorrect and in some cases as we will see, unconstitutional. Raising taxes then becomes a "must" part of any solution.

Now the CA legislature is back to square one. What will happen next is anybody's guess, given what they're up against:

Two amendments to the state constitution tie the hands of the legislature on taxing and spending. Proposition 98 from 1998 requires that 40% of new state revenues be spent on schools. In other words, if you want to cure a 15% deficit, then you must raise taxes 25%. Wow, way to go Californians! But wait there's more! Just to raise taxes requires a 2/3rds majority vote from legislature, thanks to the voters in 1978 who passed Proposition 13. The crafty CA Dems don't have the votes, so they are calling the tax increases "fees" to get around the Prop 13 language. That will NOT pass go for the CA Supremes, and the lawsuits have started. The veto was a good thing in that regard.

Of course, raising taxes will deepen the recession anyway, by driving people out of the state and further lowering property values. Simply put, counterproductive.

So could cutting spending shrink the deficit? Unfortunately, spending is mostly non-discretionary. The largest budget item is education, and the previously described Prop 98 limits prevent significant cuts. Prisons? California is under court order to increase spending by a huge amount. Why? Because the prisons are overcrowded and the health care stinks. A whopping 40% of prisoners in CA are afflicted with deadly Hepatitis C. Do you have any idea how expensive it is to treat Hep C? About $6,000 per year. With a prison population of 0.17 million, the expense for Hep C alone is over $40,000,000. Incredible? More incredible: eliminating such treatment saves only 0.03% of the CA budget.

It is one heck of a mess. And it is going to get worse, maybe a lot worse. The state cannot increase taxes (even if it were a good idea) without a 2/3rds legislative majority, and cannot cut entitlement programs, education or really much other spending. Play the California Budget Game and see for yourself. It's something to do while CA shorts its obligations and shoves the rest of the nation into depression.