After close to three months of debate, California finally passed its $103.4 billion general fund budget last week. While other outrageous fiscal events trump the state’s fiasco, it is worth noting that no one in California actually thinks the state’s budget problems are solved. Rather, they’ve plastered over a mess that will worsen with economic conditions next year and make it even tougher to balance the budget after that.
The new budget has cost savings and spending cuts, all right, but they have dubious long-term value. For instance, the budget includes $500 million in general fund spending vetoes. It also reflects $340 million in budget savings from the budgeting delay slowing or halting many government activities. That’s a terrible budgeting method that the state should never repeat.
The revenue raisers are even more problematic: tax receipts rise this year and next but offset by givebacks in later years that will cause declines in the long run. The budget slaps bigger penalties on high-income corporate filers who have under-withheld and accelerates other tax payments by changing date rules. And net operating loss deductions have been suspended for two years. On the other hand, corporations can now extend carry-back losses for two years starting in 2011, which lowers future revenues and, more important, lets firms cut their tax bills in the next recession even more. Similarly, tax credits are limited for 2008 and 2009 but then revert back to the current values (which can cut taxes to an $800 minimum). And, starting in 2010, businesses may share credits with other entities in the same organization. A change in the “yacht tax” offers the only clean source of new revenue: starting this fiscal year California residents who purchase planes, vehicles and boats will have to pay taxes on them if they were moved into the state within a year of purchase rather than three months after purchase.
The coup de grace is issuing debt against future lottery funds. Besides the small problem of needing voter approval - always questionable in the birthplace of the tax revolt—selling off future revenues for today’s spending is never a good budget practice.
Even with all this kicking the can down the road to 2010, analysts already project a deficit for next year’s budget.
In an effort to avoid repeating today’s mistakes, the governor is proposing changes in budget rules—basically strengthening the fixes put in place in the last budget crisis. These reforms might help but there are more fundamental problems: passing a budget requires a 2/3 legislative majority and some politicians simply won’t consider any tax increases, regardless of the consequences.
California lawmakers seem unable to compromise or tell their voters hard truths. Sound familiar? The national financial crisis also involves politicians who refuse to compromise across party lines for fear their constituents will abandon them.
The final irony? The budget delay has left California right in the path of the country’s credit tsunami. While financial markets are frozen, it may be unable to float the short-term debt needed for its day-to-day operations. In the end, the cost of delaying on tough decisions may spell even higher costs and more bad news for both California and the nation.
