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Wednesday, June 2, 2010


It is that time of year again when elected officials in Sacramento realize their deadline to have a budget in place is rapidly approaching and they need to quit spending time proposing laws that require citizens to use light bulbs filled with hazardous materials, ban parking in cities, and close businesses and move jobs across state borders. We are in the time period when Sacramento must figure out how to pay for the excessive spending habits they have not reined in through previous budgets, or if they will continue their habits and find other ways to fill the approximately $20 - 25 billion deficit.

You may recall that last year a similar gap was filled mainly with new taxes and more borrowing by the state. A budget was finally passed when a few Republicans in the Assembly and in the Senate left party ranks and joined the Democrats in voting "aye" and then Governor Schwarzenegger backing down off his rhetoric about no new taxes and signing the bill. Of the Republicans that crossed the aisle to raise taxes a few of them are termed out and now running for statewide office, those facing re-election are facing voters with long memories of their budget votes.

For this year's budget dance the Governor has proposed his budget, without any tax increases, and immediately it was picked apart by the major media in the state (read: Los Angeles Times, San Francisco Chronicle) and the Democrats as being "unfairly balanced" on the poor. Not facing the reality of the fact that a budget where the bulk of the spending goes to either public employee salaries or services to the "poor." I say "poor" because it seems the definition of "poor" for purposes of receiving free services from the state keeps moving up the income ladder. Further, like many states but more than most, our illegal immigrant population enjoys the ability to partake of most of these benefits and services.

Having expanded the scope of medical, education, housing and nutrition services throughout the state while decreasing the opportunities for private businesses to open and expand, Sacramento has created a balance sheet that is light on services for taxpayers and employers and heavy on services for those defined a "in need" by state bureaucrats and politicians. Now that it is time to close a $20 billion gap between revenues from fees and taxes and spending the Governor has realized that the revenue side of the budget is tapped out. Any more taxes in an economy with unemployment close to 15% in the state and unemployment plus under-employment exceeding 20% will greatly reduce future revenue through reduced tax collection due to increased job loss, corporate relocations and drop in consumer spending. Schwarzenegger realizes spending must be cut.

Naturally in criticizing Schwarzenegger's budget individual programs are chosen and picked to show the inhumanity of his budget cutting $10 million from a program that helps the elderly exercise or $25 million from a program that provides free dental cleanings to children in-need. With every story about the budget we receive the individual human interest story of someone impacted by the cruelty of the Governor's budget. Inevitably there is no suggestion as to what should be cut to close the $20 billion budget. Note that not reported are the individual stories of the worker laid off because his company has higher tax and regulatory obligations.

On the Democrats side Assembly Speaker John Perez has proposed a budget that does not cut spending, increases taxes on oil production, extends the "temporary" tax increases passed in earlier budgets, postpones a corporate tax credit for expanding businesses and job creation and borrows $9 billion. Yes, borrows $9 billion to fill the budget deficit.

So as we eagerly await the June 30th deadline to pass a budget that will undoubtedly be missed yet again, we can assess the California economic landscape in which the budget debates will occur. Rising unemployment is reducing payroll tax revenue. Increases in business failures and closings are reducing corporate income tax revenue. Increased "wealth flight" is decrease personal tax revenue on interest, dividends and capital gains. Increased unemployment is reducing consumer spending reducing sales tax revenues. Continued foreclosures on residential housing continues property value declines in some areas while other areas have struggled back to flat values, decreasing property tax revenues. An increasing rise in commercial foreclosures will see a result of decreasing commercial property values, decreasing property tax revenues.

The economic engines that generate tax revenues are in decline in the state. One of the factors in our last several budget deficits has been an over-estimate of tax revenue collection. Raising more taxes in this environment will create a bigger budget deficit merely due to another under-estimate of tax revenue due to a budget increasing taxes, again.

California is Greece. Greece's economy crashed and it took an emergency bailout from other nations to save the country. But the bailout came with strings. Greece had to change its social democratic priorities and cut spending, cut entitlements and put the economy on a foundation of a private sector generating jobs not taxes for government salaries and benefits. Government programs and entitlements that created a budget that was incredibly upside down and balanced on private jobs and companies for the benefit of public sector jobs and entitlement recipients finally tipped over.

California's budget has become similarly upside and balanced on the on the private sector. Unless the majority in Sacramento understand the economics of our state economy and public spending the budget will tip further towards complete default in the near future.

Sacramento must balance a budget based not on more taxes and expected tax revenue, and especially not on more borrowing, but rather on systematic and institutional cuts to spending and allocation of resources. We have seen through the relative lack of loss in service due to furloughs that we can cut significant amounts from departments across the state with little productivity loss. Spending must be cut, any failure to do so will plunge the state into default and economic chaos in the very near future.

Who knows, maybe the plan is to run the state over the brink forcing Washington to come save the state with a huge bail-out of its own. Being the 7th biggest economy in the world how can Washington allow it to fail? Does "too big to fail" apply to states? Maybe that is the safety net for Speaker Perez and the majority as they start to move ahead with with their plan to spend, tax and borrow out of the budget deficit.

Thankfully our State Constitution requires a two-thirds majority requirement to pass a budget. I am hoping this year every member of the minority holds firm to not passing any budget that will increase taxes and borrowing to achieve a balance, but I'm sure there will be enough defections at some point in the process to push California closer to complete default.

Remember votes counts, they have led us to where we are now. Will yours help us change direction in the future?


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