The State Budget is projected to be short as much as $25 billion when the Department of Finance releases its much-anticipated May Revision on May 14.

In the early days, when the shortfall was projected to a mere $12.5 billion, the spending lobby, to no one’s great surprise, rolled out its grand solution to bridge the gap with, you guessed it, $12 billion in new taxes (a 12% increase in state revenues). No doubt their proposals will be revised upward becoming ever more ill-advised to reflect the reduced revenue expectations.

Of course, this doesn’t even account for the growing number of fee increases (a.k.a. pseudo tax increases) being proposed in the state Legislature, thanks to the Supreme Court’s Sinclair Paint decision and actions by administrative agencies across the board. It also doesn’t account for the nearly $5 billion in added costs this Legislature and governor have piled on California businesses as a result of massive increases in worker’s compensation and unemployment insurance benefits.

Aside from the potential damage such massive tax increases would have on our beleaguered economy, it simply ignores the reality that the state’s current fiscal crisis is not a dilemma of insufficient revenue but one of excessive spending. The state has been on a spending binge of historic proportions and today is the morning after.

To begin with, the Legislature passed a budget last year that started us out $4 billion in the red. Fortunately, some of that spending has recently been eliminated, but not all of it. Now with revised revenue projections that reflect the burst of the dot-com bubble, we are looking at a deficit of perhaps $25 billion, and an on going structural deficit of from $4 billion to $7 billion, according to the Legislative Analyst’s Office (LAO). (See Addressing the State’s Fiscal Problem, Dec. 19, 2001.)

So what happened to all those multibillion-dollar surpluses the state was getting?  Good question. In the words of the LAO, “Most of the added revenues have funded growth in state programs.”

Between fiscal year 1993-94, when the economic recovery began and 2001-02, total state spending nearly doubled, with about one-half of this overall increase occurring from 1999-00 to 2000-01.

If you look back to just 1995-96, total state spending has increased 46%, adjusted for inflation. General fund growth was 52%.

Blame Tax Cuts? So much of the spending lobby mantra has focused on the culprit for the deficit being tax reduction, but the facts don’t support the case. According to the LAO, of the nearly $40 billion in new general fund growth, 43% went to new and expanded state programs; 39% to workload increases and inflation-related costs; only 6% went to tax relief, including reductions in the vehicle license fee (VLF) or car-tax, that is backfilled to local governments. Adding in all tax cuts for the period only accounts for about 12% of the run-up in spending.

Population growth can’t account for the massive increase, either. According to the U.S. Census Bureau, California’s population growth for the entire decade of the 1990s amounted to only 13.2%.

Despite double-digit annual increases in baseline spending, the state’s economy produced record surpluses and vast amounts of those monies were piled into ongoing spending.

We were forewarned. The source of much of the state’s growth was directly traceable to the economy’s surge and the corresponding income tax revenues from capital gains and stock options paid by your friendly neighborhood rich person. When the economy slid, so did state revenues.

What’s also enlightening about the source of all those extra funds is the much-talked-about legislation to reintroduce the 10% and 11% income tax brackets to make up for the state’s current deficit crisis.

California has one of the most progressive personal income tax (PIT) structures in the country (that’s tax speak for skewing taxation towards taxing the rich proportionately more). In fact, based on 1999 return data (the latest available), less than 10% of the nearly 13 million PIT returns filed account for nearly 75% of the PIT revenues that are supporting the state general fund. Given that the PIT accounts for about 58% of the state’s total spending, about 5 percent of the population pays for close to half of all state spending. The trend is upward, just like state spending.

So what happens as our economy becomes more mobile and manufacturing and other site-dependant jobs are chased out of California due to added costs and higher taxes? Our economy suffers and consequently our state revenues suffer. That’s why increasing the personal income tax rates is so illogical; it takes that much more from those on whom the state is depending in ever-increasing numbers to fund its programs and services. What’s more, because state spending has become more reliant on the upper-crust of the personal income tax, state revenues have become increasingly volatile in response to our economy. Increasing the upper tax rates to raise revenues will only exacerbate that problem.

So what’s the solution? As the LAO indicated last December, “Contrary to some popular views, most of the budget is ‘controllable’ in that it can be modified through statutory changes. For example, only debt service, a small portion of total K-12 [education] funding, and retirement contributions are truly uncontrollable in the short run. The principle even applies to Proposition 98 [the constitutional school funding guarantee], which can be suspended by a two-thirds vote [of the Legislature].”

No one likes to propose cuts in state programs. But taxpayers deserve better fiscal management that ferrets out waste and eliminates funding for obsolete or low-priority programs and spending. How can this Legislature look taxpayers in the face and ask for more tax dollars knowing that state spending has mushroomed as it has in recent years and have so little to show for it?

One answer might be a fresh look at spending growth limitations and better fiscal management ideas such as a form of zero-based budgeting. Spending growth limitations will ensure that California will not be penalized by a legislature that simply can’t say “no” to the spending lobby, a revenue base that is going to continue to vacillate, and ensure that a percentage of revenues are put away for a rainy day. A new budgeting scheme will require the state to budget its dollars just like everyone else; periodic, top-to-bottom review. We need more than simply reviewing how to spend the growth on an annual basis.

Hopefully, what the past decade has taught us is that a robust economy breeds improved state revenues. We simply can’t tax the economy into prosperity. Because the nature of our tax structure fosters a vacillating revenue stream, California policy leaders had better get used to there being periods of excess and periods of deficit and learn to manage it better. Without strong financial management, this problem only grows more serious. The public expects elected officials to start managing state finances by providing quality services within the very ample revenue structure provided by this state’s taxpayers. The current budget deficit is the best opportunity for policy makers to begin this process by challenge waste and inefficiency in California’s bloated spending plan.