Schwarzenegger's Newfound Fiscal Conservatism

The Golden State can’t seem to catch a break these days, with a budget deficit that widens by the hour, factory closings, declining exports, state-issued IOUs, and restive labor unions seeking to reinstate higher taxes for California’s beleaguered businesses.   

When my last HUMAN EVENTS column appeared in June, California’s deficit was $24.3 billion. Now, three weeks later, it’s $26.3 billion. It may likely be $27.3 billion as State Controller John Chiang (D.) has reported that June personal income taxes were $987 million below Gov. Arnold Schwarzenegger’s May estimates with sales taxes down $154 million.  California gets about half of its general fund revenue from income taxes, having the second-highest personal income tax rates in the U.S. after Maryland recently raised theirs to eclipse California in at least one category of economic stupidity.  California increased its highest-in-the-nation state sales tax rate from a base of 7.25% to 8.25% beginning April 1, a 14% increase.  

At last count, California was going into debt by about $25 million a day.  In the fiscal year ended June 30, California went about $10.4 billion in the red.  

Meanwhile, a coalition of government employee unions, led by the American Federation of State, County and Municipal Employees California (AFSCME) has filed paperwork to repeal $2.5 billion in tax breaks for business.  These tax cuts were enacted to encourage economic activity as part of last February’s budget agreement that also saw the largest state tax increase in U.S. history.  The public sector unions have long lobbied to hike taxes, including property taxes and taxes on crude oil production.  

As if to signal enough is enough, the Toyota Motor Co. has announced it is preparing to close its New United Motor Manufacturing Inc. (NUMMI) plant and the 4,700 Bay Area jobs that go with it. NUMMI, a joint venture between Toyota and General Motors Corp., has been on shaky ground since GM decided it would back out of its end of the business as part of its bankruptcy reorganization. No doubt, California’s high energy, labor and tax costs, along with its uniquely crushing regulatory burden, played a role in Toyota’s decision.  
State IOUs Not Accepted

While pressure mounts to reduce California’s deficit through additional tax increases and reductions in spending, Democrats want California’s bloated and fraud-ridden welfare system to remain out of bounds. Astonishingly, California has 32% percent of America’s welfare caseload, according to federal Department of Health and Human Services information. Compared to Texas, the next-largest state which, like California, shares a long border with Mexico, California has 7.1 times more welfare recipients as a percentage of population.  

The vast difference in welfare caseload between California and Texas shows that California’s problem isn’t primarily due to illegal immigration.

California’s severe, self-inflicted fiscal stress has led it to begin issuing registered warrants (IOUs) on July 2 for only the second time since the Great Depression.  Many of California’s major banks refused to accept the state paper after July 10, while many of California’s credit unions agreed to accept them.  As of July 8, California had issued 91,000 registered warrants totaling $354 million.  The warrants pay 3.75% interest.  

In a comment on the IOUs’ worth, some state agencies have indicated that they would refuse to accept IOUs from businesses who received the scrip from the state in lieu of cash.  To remedy the embarrassment of the state’s refusing to accept its own IOUs as payment, and to save the state interest payments on the outstanding IOUs, Assemblyman Joel Anderson (R-El Cajon) authored AB 1506.  Anderson’s measure passed its first Assembly committee on a unanimous 11-0 vote on July 7.  Its next stop is the Assembly Appropriations Committee, then the assembly floor, where Anderson’s well-known legislative work ethic enhances the urgency bill’s chance of gaining the two-thirds vote required for passage.  

[In 2007, Anderson authored a bill to divest over $24 billion of California’s public retirement funds from foreign businesses that invest in Iran.  Anderson’s Iran divestment bill, AB 221, was signed into law after stiff initial opposition.  Anderson is the conservative favorite for the 36th State Senate seat, currently held by term-limited Senate Republican Leader Dennis Hollingsworth (Murrieta).]  

Schwarzenegger Standing Firm

Schwarzenegger and six Republican lawmakers joined the Democrats to pass the biggest state level tax increase in U.S. history last February. But this time, Schwarzenegger and legislative Republicans are holding firm on taxes. Further, to his credit, the governor is standing with Republican legislators to demand meaningful government reforms and spending reductions to bring the budget into balance.  

Schwarzenegger’s newfound fiscal conservatism has made him a target of the public unions as was the case in 2005 when they spent $150 million to defeat his year of reform ballot initiatives. This year, only four days after the unions started running a pro-tax, anti-reform TV ad aimed at Schwarzenegger, he responded with his own ad. As the Governor’s well-known visage looks into the camera, he says, “Sacramento is asking me to sign a budget that raises your taxes and spends money we do not have…” Let’s “clean house… …I’m asking you to stand firm with me.”  The 60 second ad harks back to the heady days of the 2003 recall when voters perceived Schwarzenegger as a right-of-center government reformer, rather than the 2006 to early 2009-era “post-partisan” compromiser.   

The outlines of a final budget agreement appear to be taking shape. Taxes and fees as a means to close the $26.3 billion deficit are off the table. What is likely is budget revision that reduces spending $13 to $14 billion while relying on borrowing from local government to bridge the rest.  Ironically, local government’s stronger financial picture means that they can borrow money more readily and at a lower interest rate than can the insolvent State of California.