Thomas Del Beccaro is California Republican Party Vice Chair, Publisher of and author of The New Conservative Paradigm

Less Politics & More Economics

Once again, California is facing an enormous budget shortfall. The reasons are simple: spending has increased at a blistering pace (44% over the last 4 years) and huge revenue increases (40% over that same 4-year period) have not been able to keep up. The size of the deficit is dramatically increasing this year because revenues are lagging even farther behind projected spending.

The Democrats in control of our legislature have made it clear: they want the deficit “solved” by increasing tax rates and “fees” of every sort. Republican leaders, on the other hand, want to reform the budget process, reduce spending and improve the business climate in California.

In the recent budget fights, relatively minor fixes were attempted, including borrowing, “interesting” accounting practices and the like. This time, however, no minor fix will do.

That is so because in the decade ahead, the federal government will be facing enormous budget shortfalls as Social Security and Medicare transition from huge surpluses to huge deficits. As that occurs, the federal government will be pushing ever more and larger programs onto the states. Combined with California’s own emerging unfunded pension and healthcare liabilities, time is running out to make sensible and measured reforms to the state budget process.

The obvious solution lies not in politics but in economics.

No business, large our small, can avoid bankruptcy for long if it has mandated spending untied to its revenue stream or its customer base. That is exactly what California government does however. Government spending increases regardless of its revenue base, the number of Californians, or their needs.

Politicians are loath to relinquish the power of the purse and often measure their record based on the size of their appropriations instead of the effectiveness of services provided. That is an age-old problem as President Calvin Coolidge noted during the 1920s, when he said: “Nothing is easier than the expenditure of public money. It doesn't appear to belong to anyone. The temptation is overwhelming to bestow it on somebody.”

In the nearly 100 years since he said that (and his budget was just $3 billion dollars), this Edifice Complex has become worse, much worse. Given that, it is time to recognize that we must restrict politicians’ ability to continue to ignore economics. Indeed, we must restrict their ability to write checks.

Step one in the process is for California to move to a two-year budget. Each January, like returning swallows to Capistrano, hundreds of politicians and staffers return to Sacramento to introduce thousands of new bills – all of which involve spending (it costs the government an average of over $20,000 to process each bill); most of those bills include new spending programs. A two-year budget cycle might reduce by half that bill-writing temptation.

But, that is not enough.

California must enact, either through legislation or voter initiative, a real spending cap that ties future spending to growth in its customer base, i.e. population and inflation, and its revenue base. Without that common sense recognition of simple economic realities, California will face the challenge of the decade, not only unprepared, but probably bankrupt.

On the revenue side, California needs a dose of economics as well. California is the most expensive of the 13 Western states in which to do business. We are surrounded by states without income taxes, lower sales tax rates and lighter regulatory burdens. That has resulted in California losing jobs to neighboring states and countries. In turn, that reduced economic activity has resulted in lower tax revenues.

At the same time, America is facing the second highest household tax burden in its history. Overall, the tax burden is 60% higher today than it was in 1965 – even though the top income tax rate in 1965 was 70% compared to 36.9% today. That is so because we have been saddled with a myriad of taxes since then.

The answer to our deficits troubles, however, is not to raise tax rates as Democrats reflexively want to do – especially since 10% of California income-tax payers already pay 80% of income taxes. Any further increase will drive even more out of the state.

Californians need to remember when we tried that before. In 1991, in a soft economy, then-Governor Wilson increased tax rates in response to a budget deficit. The result? Revenues in years 2 and 3 after that rate increase actually dropped $2 billion.

Conversely, when Harding & Coolidge slashed U.S. income-tax rates from 73% to 25%, government income revenue rose over 61%. The same held true after the Kennedy rate cuts from 91% to 70%, and when Reagan cut rates from 70% to 28%; when Bush 43 cut taxes, revenues jumped $700 billion.

That’s economics not politics. We need the same here in California.

Most states base their income taxes on a taxpayer’s federal return - not so in California. We are saddled with dealing with our own tax code with different depreciation schedules and more – all of which raises the cost of doing business in California.

In order to develop a sustainable tax base, we should scrap our separate tax code and work off the federal return like the states with which California competes for employers.

We should lower, not increase, tax rates to combat the soft economy. Although there will be some lag in revenues, a new two-year budget cycle will allow the budget to remain every bit in balance as the last several years and eventually bring it into true balance and produce a surplus.

Recently, Barack Obama said he was going to “go after” the wealthy in this country to pay for his social engineering programs. It was as if they were big game to be hunted down. Fabian Nunez and Don Perata, the Democrat legislative leaders for the last fours years, have had the same mentality. Such politics have resulted in bad economics causing employers to migrate to employer-friendly states such as Nevada, Arizona, and beyond.

It is time to recognize that it is time to do what is necessary and right; it is not a question of a way, but of will.