The Metropolitan Forum Project Reviving Citizen Civic Engagement

Reinventing California: Primed for Fiscal Overhaul

October 12, 2003

Part Two of a five part op-ed series exploring the roots of the recent gubernatorial recall and the failure of state government in California.

Picture this: The governor, flanked by beaming community and business leaders and elected officials, signs into law a $1.5-billion package of tax relief for motorists, businesses, families and seniors. Is this Arnold Schwarzenegger in a few months, carrying out his promise to solve the fiscal mess in Sacramento and restore California's economy? Nope, it was Gov. Gray Davis on July 7, 2000, doling out what he called "the largest tax rebate in California history."

How quickly times change and how slowly California's brittle, overly complicated fiscal structure changes with them. Huge revenue surges in boom times enable grand gestures, but revenue inevitably plunges when the economy turns. Local government has for years been robbed of the reliable revenue it needs for street repairs, parks, libraries and water and sewer plants. Statewide, highways are deplorable, state buildings are aging and the ability to deliver water is falling behind demand. The state budget, of course, is in unspeakable condition.

Yet ....

California ranks high among the states in average personal income and has lost fewer jobs proportionally than the rest of the country -- in fact, counties outside the Bay Area gained jobs during the downturn. More new businesses were created than lost. Except for Silicon Valley, the high-tech industry remains strong, and UCLA experts expect the economy to grow by 2.3% this year and 3% in 2004. The tax burden is near the national average, and California has the fewest government workers per capita of any state.

The problem is not lack of resources or capability but that state revenue gyrates wildly, budgeting is straitjacketed by the requirement of a two-thirds legislative vote and flexibility is erased by requirements on how the money must be spent. The state has usurped too much spending power and decision-making from local governments.

Fixing these things is separate from slogging through the current crisis, which will in the end require temporary revenue increases along with spending cuts already passed and new ones that Schwarzenegger's team will be combing the budget for. It will be important to keep the remedy for the current pain -- pain that includes the car tax -- separate from larger reforms.

Businesses groaning under excessive costs are hurt not so much by ordinary taxes as by such things as workers' compensation and ill-timed insurance mandates. These too are issues separate from fiscal reform.

The story starts with Proposition 13, the 1978 voter initiative against soaring property taxes. The sweeping measure fixed one big problem by cutting and capping runaway property taxes on homes and businesses. But an unintended result was to shift taxing ability and spending decisions from the school districts and cities and counties to Sacramento. It also increased dependence on the state income tax.

The State Is Ready for Change

Enter the Schwarzenegger administration, borne on a wave of voter revulsion at politics as usual. There hasn't been a riper time for change since 1978.

Fiscal reform plans -- handsome volumes from study commissions -- line the shelves in Sacramento. Specific measures, proven in other states, appear over and over. Political apathy and division, aided by special-interest money, have kept them from being seriously considered. Dust the reports off, open them and find these good ideas:

* Give local government specific, logical functions and the funds to carry them out. The state shouldn't be doling out money for cops on the street or funding for local parks and recreation facilities. Cities and counties need reliable revenue -- not the current "the state giveth and the state taketh away" that reduces mayors to backstabbing one another to get the next big-box store and its sales taxes. These cash generators come at the expense of established businesses and sensible planning and zoning.

* Eliminate the two-thirds rule on passing a budget and raising taxes. This would require voter approval, which is more likely to be gained if the change is part of a larger package of political reforms -- such as revising term limits -- that would stabilize the Legislature. It will help that power is now balanced between a Democratic-majority Legislature and a Republican governor.

* Apply the sales tax, at a lower rate, to services like lawyering and accounting. This would make it possible to slightly reduce retail sales tax rates as well. Requires a two-thirds vote of the Legislature.

* Make it much harder for businesses to duck reassessment under Proposition 13, so that the sale of a skyscraper can't be cloaked as a lease-back. Sen. Martha Escutia (D-Whittier) is sponsoring legislation, SB 17, to tighten the definition of change of ownership.

* Merge the Franchise Tax Board and the state Board of Equalization into a single department of revenue. Currently, one collects sales and property taxes while the other administers income tax law. Both maintain large bureaucracies and both are elected. Each batch of elected officials brings new policy ideas to each agency, which drives businesses crazy. Requires a state constitutional amendment.

If sales and property taxes bore a slightly larger share of the state's revenue needs, dependence on a steeply progressive income tax could also be reduced. It is at the top brackets that volatility is highest; when the rich lost their capital gains in 2001, California's revenue plunged more steeply than other states'.

An End to 'Gotcha' Politics

As a moderate Republican entering office in a populist revolt, Schwarzenegger has an opportunity to wrestle consensus from two squabbling parties and the voters. He has promised to respond not to special interests or partisanship but to the needs of the state's economy and citizens. He'll have to go beyond slogans to accomplish that. Some of his ideas about evil, wasteful government need toning down.

Democrats already setting legislative booby traps for the governor-elect will only arouse voters' wrath again. So would Republicans who are itching to fight him on conservative principle. All sides can see where "gotcha politics" have brought California's fiscal house. They should sit down and fix it.


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