Larry McCarthy

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Where Did Windfall Come From?
By Larry McCarthy

California's $4.4 billion budget bonanza is cause for celebration, but before policy makers leap into a modern-day gold rush and spend it all, let's examine how government struck all this paydirt.

Unlike the accidental discovery of a nugget on the American River 150 years ago, California's robust fiscal condition is, at least in part, a result of investments in an economy that rebounded from the deepest recession since the Great Depression.

In 1991, California experienced its worst budget crisis - a $14 billion deficit. Seven years later, the state has its healthiest budget condition in 20 years.

State General Fund revenues have now grown more than 35 percent in four years. The $57.8 billion revenue figure for 1998-99 is an astonishing $15.1 billion higher than 1994-95 revenues. In a healthy and growing economy, California's tax structure provides a powerful revenue generator.

Over the objections of a powerful spending lobby - public employee unions and local government advocates - the Legislature and Governor Pete Wilson have chosen wisely as revenues increased. They invested in the economy rather than committing revenue surges to ongoing programs, which makes deficits inevitable when the economy dips and unemployment rises.

Balanced investment made in the 1990s fueled the economy, improving the business climate and creating jobs. The Wilson Administration now projects the creation of 800,000 jobs in 1998 and 1999 combined.

Major steps to bolster and nurture the rebounding economy included:

• A record $1 billion tax cut passed in 1997, including an increase in the dependent tax credit, conformity to federal reductions in the capital gains tax for home sellers, relief for subchapter S corporations and business research-and-development credits.
• A reduction in the state's corporate income tax rate from 9.3 percent to 8.84 percent passed in 1996. This cut turned out to be the largest tax cut for business by any state that year, about $295 million a year.
• In 1995, the top 10 percent and 11 percent personal income tax rates, adopted temporarily to help deal with the 1991 budget crisis, expired, despite strenuous efforts by lobbyists for public employee unions to make them permanent, including a ballot initiative that was rejected by voters.
• A 10 percent reduction in state business taxes in 1993 through adoption of incentives that included the manufacturers' investment tax credit.
• Landmark reform of the workers' compensation system in 1993, cutting costs by at least $4 billion annually, including 40 percent insurance rate reductions.
• Long-overdue reforms in property tax administration passed in 1995 that curbed overly aggressive attempts by county assessors to expand property tax collection.

Hundreds of thousands of new jobs and economic activity have produced massive growth in state and local revenue. This is more money for essential government services like schools, public safety and highways. Education funding, for example, has grown at nearly twice the rate of inflation since 1991.

The improved economy also has resulted in budget surpluses for many local governments. City councils and county boards of supervisors should be careful that they also choose wisely and invest in ways that promote further growth.

Each tax reduction in California has been followed by greater-than-expected revenue growth and budget surpluses. The current state budget outlook, even rosier than last year, is clear and convincing evidence that tax cuts work for the California economy.

- Larry McCarthy is president of the California Taxpayers' Association (Cal-Tax).