June 1, 1996
California's economy is bouncing back, with $2.7 billion in additional revenue expected through this year and next. Jobs are being created -- 300,000 a year -- in a boom reminiscent of the roaring 1980s.
It is welcome news that flowed from Governor Pete Wilson's announcement of how much the state has to spend in his May revision of the proposed 1996-97 state budget. The governor proposed increases in funding for public education, including smaller class sizes, that were widely, and deservedly, applauded.
He also reiterated his call for a 15% across-the-board reduction in personal and business income tax rates, phased in at 5% a year. It is embodied in legislation (AB 2033 by Assemblyman Jim Brulte). This Assembly-approved bill has met rejection in the state Senate despite an amendment that would suspend the tax cut if revenues fail to sustain school funding at guaranteed levels.
Defeat of AB 2033 does not end the tax debate in Sacramento. There will be further negotiations, including discussions of specific tax incentives for businesses. Across-the-board relief from taxpayers' heavy burden of supporting government with one-third or more of incomes deserves broad-based support. It is needed to reinforce California's ability to withstand the next recession without harmful tax increases.
Taxpayers throughout California should be concerned about efforts in Sacramento to take the economic recovery dividend, as the governor calls it, and spend all of it on more government.
To avoid future budget deficits, policy makers must recognize the state's boom-and-bust economic cycles. During periods of prosperity, revenue growth at the state level can be dramatic.
However, these spikes in revenue, if used to increase the spending base, will over commit the state during an entire economic cycle. Spikes in revenue cannot be sustained over the long haul. When the economy begins to recede, there is a sharp reduction in revenue.
In the 1980s, California revenues spiraled upward during a prospering economy. But, looking at the entire decade as well as the first half of the 1990s, California's finances were on quite a roller coaster ride. State revenues grew 13.8% in 1988-89, for example, and only 1.38% in 1990-91, while spending went from 7.6% in 1991-92 to minus 5.49% in 1992-93.
When the recession struck in 1990-91, a massive tax increase was passed to close a record $14 billion gap between spending and revenues.
Reality is that there will always be booms and busts. Over obligating tax dollars during good times with additional unplanned spending that expands the base of a continuing program simply cannot be sustained during bad times.
Just as a successful farmer would say it is unwise to eat all the seed corn, if all the surplus is consumed by government without plowing some back into the economy, the state is guaranteed a deficit in the next recession.
(Contact: Ron Roach, director of communications, 916-441-0490 or rwroach@speedlink.com.)