This article is from Cal-Tax Digest, published
by the California Taxpayers' Association.
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For the fourth straight year, California is blessed with a multibillion-dollar budget surplus and, over the next few weeks, Governor Gray Davis and the Legislature will decide how the windfall will be used. Taxpayers prefer investment in the economy and infrastructure, not a spending spree.

According to Governor Davis' $80.8 billion "May Revise" of the 1999-2000 budget proposal, high levels of revenues are still flowing into the state treasury. Since proposing a $77.5 billion budget last January, the economic picture has improved so much that, through June 2000, the state expects more than $4.3 billion of additional revenue. About half of that is deemed ongoing in nature.

California policymakers have a mixed record in handling surplus revenue. Over the years, investments of surplus revenue has produce economic growth and more revenue surpluses, while using surplus revenue for ongoing spending programs has resulted in chronic deficits.

Boom-bust Cycle
When state revenues grew quickly, the budget was put at risk by overcommitment to ongoing spending that the state cannot afford when the economy slows. As should be clear to everyone, California's state finances are subject to boom-bust cycles.

The state would have enjoyed an $8 billion surplus in 1991, instead of a $14 billion deficit, if policymakers had merely held spending growth to the average rate of revenue growth from 1985 through 1990.

The 1991 budget, with its huge deficit and resulting tax increases, showed the destructive impact of having committed too much of the 1980s revenue surge to ongoing spending programs. We should not repeat the mistake.

Investing the surplus wisely to nurture the economy can foster a continuation of economic growth, perhaps forestalling the inevitable bust, or softening its impact.

To some degree, the tremendous rebound from the deep recession of the early 1990s should be credited to a number of investments of tax dollars into the recovering economy. The Legislature and former Governor Pete Wilson should be commended for making decisions in the 1990s that help the economy grow, improve the business climate and create jobs. There have been hundreds of thousands of new jobs, fueling economic activity. As Californians prosper, they pay higher taxes.

Tax changes that have helped spur the economy to greater heights include a reduction in the corporate income tax rate, still among the highest in the nation; a reduction in business taxes through research-and-development credits; a manufacturers investment tax credit, and landmark reform of the workers' compensation system that cut costs by at least $4 billion annually.

Tax Cuts Work
Each business-friendly policy change 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

Everyone benefits when care is exercised in the spending of surplus revenue during good economic times. Education funding, for example, has grown at nearly twice the rate of inflation since 1991. There is more money available for essential government services. California's general fund spending has increased by 50 percent in the past half-decade, from about $40 billion to more than $60 billion.

Another investment option for surplus revenue that is appealing to taxpayers is to fund necessary one-time capital projects. California faces an infrastructure crisis. A study for the California Business Roundtable says about $90 billion is needed for highways, water delivery, sewer systems, and prisons over the next decade. (Recent estimates are even higher: $116 million just for transportation infrastructure in the next 10 years, according to the state Transportation Commission.) Allocating surplus revenue to meet this state's critical infrastructure needs is highly desirable.

Vigilant attention to California's competitive tax structure, business climate and infrastructure is critical to continued economic growth. This careful investment in the economy must be an ongoing focus of policymakers.

- Larry McCarthy is president of the California Taxpayers' Association.