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Back in Black

by: Robert Cruickshank

Fri Jan 11, 2013 at 08:30:00 AM PST

The structural revenue shortfall ends because Republicans have been thrown out of government

This week's big news is the announcement from Governor Jerry Brown that the state budget is out of perennial deficit and looking at several years of surpluses. Over the weekend we'll talk more about what those surpluses mean and how they ought to be used. But today it's worth taking a moment to remember how we got here.

Since 2001 or so, California's budget seems to have been in perpetual deficit, with less money coming in than was needed to fund existing public services. While the deficit pressure eased in 2005-06, that didn't last, and by the summer of 2007 the deficits had returned as the housing bubble popped and the country slid into the worst recession in 60 years.

Republicans and many of their media enablers claimed this was due to Democrats "overspending" and that the only solution was massive austerity. Thanks to the rule requiring a 2/3 vote of the legislature to pass a budget, Republicans were able to force Democrats and the state to accept this argument, and from 2007 onward state budgets included brutal cuts to health care, education, transportation, local governments, the courts, and other things that are necessary to keep California functioning as a 21st century society.

But those right-wing claims were never true. In fact, they were little more than deflections from the truth - that the deficits were caused by Republicans themselves and their anti-tax ideologies.

The story began in 1978 with the passage of Prop 13, but this particular chapter's true beginning came in 1996. During the 1980s state government had cobbled together an unwieldy but workable fix to the devastation to revenues and public services that Prop 13 had wrought, aided by that decade's economic boom. The '80s economic expansion was unsustainable, rooted in weapons, finance, and housing. By 1991 it had all come apart. Once again, the state government cobbled together solutions, as moderate Republicans and Governor Pete Wilson joined Democrats to pass a mixture of spending cuts and tax increases. By the middle of the 1990s the state budget had stabilized, and surpluses were projected for the first time in years.

But California was also undergoing historic political change. In 1992 the state flipped from red to blue in the presidential election for the first time in many decades. Republicans in 1994 won a tenuous majority in the Assembly by stoking white resentment at the rising Latino population, but this was only a temporary win. They needed something else that could stem the rising Democratic tide.

Republicans figured the answer was to fan the flames of the tax revolt. The first step came in 1996 when Proposition 218 was placed on the November ballot. This measure required a 2/3 vote of the people to raise most local taxes, setting up widespread municipal financial woes in the coming years.

But their main thrust came in 1998. As the dot-com boom gathered pace, the state had huge budget surpluses. Rather than use the surplus to fund new programs or new capital investments, Republicans, worried about their fortunes in the 1998 statewide races, decided it was time for a huge tax cut. Democrats, eager to appease the tax revolt, went along.

The result was the creation of a structural revenue shortfall. Rather than a one-time tax rebate, tax rates were permanently lowered. The consequences became clear in 2001 when the country entered recession. As tax revenues declined, it became clear that the 1998 cuts had gone way too far, and Governor Gray Davis found himself short nearly $30 billion in revenue.

Republicans had engineered a crisis. Now they took advantage of it to reclaim power, pushing through the recall of Governor Davis in 2003 and replacing him with Arnold Schwarzenegger. There were many issues driving the 2003 recall, but in many ways this was the final triumph of the tax revolt. Schwarzenegger ran against the restoration of the vehicle license fee to the levels it had been at from the 1940s to 1998, and blamed the state's budget woes on overspending.

Once in office, he refused to consider new tax increases even though economists suggested he do so, and instead borrowed money to cover the shortfall. He also pushed through, with Democratic support, a new cut of the VLF, creating a $6 billion hole in the state budget that was only filled last November by the passage of Prop 30.

The underlying structural revenue shortfall never went away. When the housing bubble burst and the nation slid into recession in 2007 (California got there a few months earlier) the revenue shortfall problem was again revealed. And again, Republicans demanded and won not just more spending cuts, but also more tax cuts. Even as billions were being cut from schools, Republicans leveraged the 2/3 rule for passing budgets to win new corporate tax loopholes. California became a laughingstock, a national poster child for supposed liberal fiscal excess.

By 2009 Democrats finally agreed with what we progressives had been saying for years: that the only way to fix the state's financial woes was not to cut spending, but to take power away from Republicans. On New Year's Day 2013 I described how this was done. In 2010 Prop 25 passed, ending the 2/3 rule and eliminating Republican power over state budgets (though not yet over tax increases). That same year, Democrats swept all statewide offices, including retaking the governor's mansion. In 2012, Democrats went further, winning a 2/3 supermajority while also ending the structural revenue shortfall with Prop 30. They even managed to close the corporate tax loopholes created in 2008, with Prop 39 passing by a healthy margin.

Yesterday we saw that elections have consequences, as Governor Brown announced the end of deficits and the return of surplus. It is not a coincidence that this happened after Republicans were kicked out of state government and after the tax revolt was ended. California's fiscal woes were a direct result of Republican policies, and now that the Republicans are gone, so too are the structural deficits.

That's not to say all is rosy. California still has widespread unemployment. The safety net and public schools have been shredded by 30 years of low taxes, and in particular by the Republican-driven austerity of the late '00s. California has a lot of spending needs in the coming decades in order to build a sustainable society and to address global warming, as well as to finally overcome a century and a half of inequality.

But it is possible to begin solving those problems now that the Republican Party has been destroyed and the state budget crisis has ended. California has a future again - if the supermajority decides to start building one.

Robert Cruickshank :: Back in Black
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Back in Black | 15 comments
It's not over... (0.00 / 0)
Interesting you reference the "The Democratic Supermajority: Use it or Loose it" article.  Given that Jerry used language in presenting the budget that only a right winger can love ("We must live within our means"), I am not terribly optimistic that the supermajority will decide to start building a future.  Mostly because if they do, Jerry will just veto it.  You could even argue that the Republican Veto has now effectively been replaced with Jerry's Veto.  I am also not optimistic that putting pressure on Jerry to not Veto anything coming out of the legislature that looks or smells like a tax will work.  He has pretty much convinced himself that the public won't go along with a tax that they themselves don't approve of and is too stubborn and obstinate to see it any other way.

I think Dems will loose the supermajority in 2014 and we'll be right back at deficit and austerity in 2016.  I look around at my peers (folks mid-30s like me up to their 40s) and what I mostly hear is "austerity before taxes."  They don't give a bleep about poor people and generally think their poverty is their fault.  I guess you could say that I am decidedly pessimistic about the future.

We are not entirely there (3.00 / 2)
Then we need to help make California less of a joke among the  entrepreneur class. Getting more opportunities in our state means more jobs and tax revenue coming in. We have to change the reputation of our state so we can make California golden again.

We cant just milk the existing people to death, but we need a wider tax base to make our dreams and goals of a state to come true.

If we get the small business owners wanting to set up shop in our state again, then the Republicans would be neutered.  

[ Parent ]
If California is such a joke among entrepreneurs (4.67 / 3)
Why is the largest domestic IPO in history here in California?

Why are two of the ten largest companies in the world here in California (Apple and Chevron)?

Why is the largest financial services company here in California (Visa)?

I've started companies in California; it is the best place I've found to do so.  People like living here, there are highly skilled people here, and when you need funding, the money is here.

[ Parent ]
reply (2.00 / 1)
Of course VISA, Facebook and others are in California. Talented people would rather work in California than North Carolina.

I am speaking about small businesses that are trying to stay alive in our state.


The regulatory climate kills these people who employ many in our state. Figure out how to provide a clean environment without having to kill jobs.  

[ Parent ]
Regulatory myth (6.50 / 2)
I have owned many small businesses in California. I still do. While regulations may be onerous to large businesses, I have to say I honestly don't even notice them. Never have. That is, frankly, another Republican myth.

[ Parent ]
Broaden the base, ah yes, sounds so (4.00 / 1)
Republican, the upper incomes should pay more, as it reminds Me of something I've read recently, it's entitled:

The Brutal Truth About How Childhood Determines Your Economic Destiny Oh and yes I believe this applies even more so to America now, Austerity is a Poverty Trap...

[ Parent ]
Agreed (3.00 / 1)
As a student studying for a teaching credential, I see that first hand. Sadly the elite want to make more impoverished people so they can exploit them.  

[ Parent ]
Yes... (0.00 / 0)
It does sound Republican.  One of the successes of Republicans over the last 30 years was to move the country to the right so that even Democrats (of the "moderate" variety, or "Socially liberal and fiscally conservative" contradiction) would buy into what was once considered only conservative language.

[ Parent ]
WOW !! (1.00 / 2)

...Given that Jerry used language in presenting the budget that only a right winger can love ("We must live within our means"),

Jees !!
He wants to 'Live within our means' ???
That's not the Democratic way !!
Is it ???

[ Parent ]
Damn right Wow... (5.00 / 1)
The problem is not the idea of "living within our means" but the idea that such a seemingly innocuous statement such as that can even be applied to the government which exists to provide services to the public.  Should ordinary folks live within their means?  Yes.  However, the term is used too often by the right wing to equate government budgets to Joe Citizen's household budget.  That's like saying "a Cessna 152 and Boeing 747 are airplanes and thus the same."  No, they're not the same, they are different, one decidedly more complex than the other.  To say that a Boeing 747 should "live within it's means" is like saying "lets see if we can cut the amount of fuel the Boeing 747 uses and see if it'll still make its flight to Sydney without crashing into the Ocean!  Oh it did?  Sucks for the passengers but at least the airplane lived within it's means!"  Obviously that's not acceptable.  So why is it that cutting the services so many people depend on just to live acceptable?  Or allowing students to endure decades of crushing student loan debt?  I could go on but you get the point (maybe)!

[ Parent ]
No !! (4.00 / 1)
A NATIONAL government can live Beyond its' means
Because it Prints Money
That's Keynesianism
That is reasonable
(to a reasonable degree)

A State or Local government CANNOT Live beyond its' means
Because they don't have the authority to Print Money

NO State or Local goverment can live beyond its' means for an extended period of time

Basic stuff here...

Jerry Brown is right, California MUST Live withing its' means

[ Parent ]
Not so Simple (0.00 / 0)
You are right about the printing of money but the problem with Brown's statement is that it pretends that it is self-evident our "means" are.  Brown wants to accept the growing inequality in the state as a given as well as the notion that there cannot be any way to raise revenue that might enable the state to flourish.  It is a political and not an economic judgment that he is making and is completely consistent with Brown's approach for his entire career.

Let's take one example, there was a study done that showed that it would cost the median tax payer $48 a year to restore higher ed to its 2001 funding levels and enable a dramatic roll back in student tuition which would help solve a huge debt problem for the future.  We could do that within our means.  But you won't see Brown admit that.

[ Parent ]
He DID (0.00 / 0)
Jerry Brown DID raise revenue during the last election
He had to promise not to indiscrimately raise it
A Lot of people thought he couldn't do it

I'd love to see education funding restored
But, face it, a LOT of voters don't trust Demcorats to spend reasonably

we're giving UC and CSC administrator a King's Ransom in salaries
Fix that first, then worry about increasing other funding
It's a Scandal what we pay Chancellors and top staff  

[ Parent ]
Actually no... (0.00 / 0)
Jerry did not raise revenue.  What he did is say "California, you have a choice, tax or cuts."  The results of Prop 30 clearly showed that the voters preferred taxes over cuts.  He could build on that momentum to make some modest tax increases, especially now that legislative democrats have the supermajority they need for revenue.  What he did was, in effect, take a pot shot at the legislature with his "live within our means" comment to tell them that he'll veto any taxes (without really saying it).  Since the public actually expects the legislature to govern and do its job, this will pretty much guarantee that Dems will loose the supermajority.  Which is, as has been pointed out here on Calitics, what they want.  They liked being able to blame republicans for all of the state's problems, now they are in a position where they actually have to do their jobs and they don't like that.  Because if they do their jobs then they have to take a risk that they'll get booted out of office (rather than make the case for why revenue is necessary).  They'd much rather preserve the status quo.

You're right about the UC and CSU administrators.  They really could use a tamp down in their rather large salaries.  And, Jerry needs to clean house at the UC Admin.  Too many of those guys have Wall Street ties.  Not a good group of people to be managing the finances of California's colleges and Universities.

[ Parent ]
Your thesis.... (1.00 / 1)
"But those right-wing claims were never true. In fact, they were little more than deflections from the truth - that the deficits were caused by Republicans themselves and their anti-tax ideologies"

Bu then all your supporting paragraphs cite republicans backed by democrats in passing these measures. In fact most were passed by Democratic legislatures.   Let's be straight - the Californian people didn't want these taxes and the interests that want services/programs fought tooth and nail by using courts, passing bond measures, etc to keep them.  

Painting it red & blue doesn't cover it. The people didn't want taxes and the interest groups that wanted their programs have fought to keep them until we got into this crisis.  Prop 30 was when the special interests won.

Back in Black | 15 comments
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