In California, budget drama grows

SACRAMENTO, Calif. ― Tension is reaching new heights this week in California’s budget drama, with the state set to issue IOUs if the legislature and governor fail to pass a measure within days. The last week has seen Democrats intensify their efforts to identify revenues to help balance proposed cuts, only to have Republicans including the governor reject their proposals.

In 2008 California’s budget deficit was $14.5 billion. It has now grown to $24.3 billion. To close the gap, Republican Governor Arnold Schwarzenegger has called for cuts including ending health care for over 900,000 poor children, ending the CalWorks welfare-to-work program that provides cash aid to the state’s poorest families, ending in-home health services for most elderly or disabled Californians, cutting $4.5 billion from K-12 education, and phasing out Cal Grants, the college fee assistance program.

On all these issues, the Democrats have attempted to lessen the pain. Though they, too, propose deep cuts, they are determined to find new sources of revenue as well. They have refused to end health care for poor children and welfare-to-work. They have rejected ending Cal Grants and making further deep cuts in aid for the poor elderly and disabled.

Democrats have a healthy majority in both legislative houses. So how can the “no spending” and “no new taxes” antics of the governor and his Republican cronies threaten the citizens of California and bring the world’s seventh largest economy to a halt?

California is the only state in the U.S. to require a supermajority two-thirds vote to pass a budget and to raise taxes. (Meanwhile the state requires only a simple majority to pass tax loopholes.)

The state has faced budget shortfalls before, especially since 2001. That means all the easy solutions ― such as having unspent reserves, deferring maintenance, eliminating nonessential programs and services ― have been used up. The state has now borrowed to the point that debt service alone will rise to $4 billion in 2009-2010.

Meanwhile California’s population has grown by more than 4 million since 2000, and seniors are the fastest growing segment, thereby increasing the need for health and age related services.

Today’s crisis has its roots in history.

In 1933, during the Great Depression, the state’s constitution was changed to require a two-thirds vote to pass a general fund budget. In 1978, Prop. 13, which includes a provision requiring a two-thirds vote to raise taxes, was sold to the public as a protection for homeowners against rising property taxes. Prop. 13 also exempts all commercial property from regular tax reassessment. According to a recent survey, 63 percent of Californians support “closing the loophole” that allows corporations to avoid reassessment of the value of new property they purchase.

Proceeds from the state sales tax have declined over time, reflecting a shift in economic activity from goods to services, and the increase in Internet and mail order sales that escape taxation. If taxable purchases accounted for the same share of spending today as they did in the late 1960s, the state would collect $15.9 billion in additional sales tax revenues.

If California corporations paid the same taxes in 2008 as they did in 1981, (before former President and California Governor Ronald Reagan’s trickle-down theory took hold) corporate taxes would be $7.3 billion higher. Tax cuts the state enacted between 1993 and 2006 will cost the state $12 billion in 2009-10. The largest reduction is the $4.8 billion cut in the vehicle license fees.

Tired of taxes? But wait, there’s more. Late last month the Sacramento Bee published an article by Jean Ross of the California Budget Project, revealing the latest tax cuts for the state’s corporations. Quietly slipped into the budget agreements passed by the legislature in September 2008 and February 2009 were provisions that corporations may be taxed only on sales taking place in California. They may transfer tax credits among related corporations, and a corporation may “carry back” losses by receiving a refund of taxes they’ve already paid. These new loopholes will benefit a handful of the biggest corporations to the extent of about $2.5 a year.

So we have Republicans demanding an end to health care for over 900,000 poor children, which will save $375 million a year, but not a single word about the $2.5 billion in tax cuts for corporations.

Stay tuned!