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Right Turn
Posted at 10:30 AM ET, 05/14/2012

We don’t all wish to be California

If Greece’s economic woes are not a flashing red light for U.S. policy makers, perhaps they will take California’s example to heart. This weekend California Gov. Jerry Brown broke the news to his state: What was projected in January to be a $9 billion budget deficit is now $16 billion.

How does that happen, exactly? It’s mind-boggling unless you understand that California has the worst business climate in the country and its revenue projections turned out to be wildly over-optimistic. Reuters explains: “The deeper deficit forecast reflects the state’s uneven economic recovery: tax collections this year have fallen about $4 billion below projections, though many state legislators and economists had warned that the January revenue estimates were far too optimistic.”

So the cruddy national recovery worsened by California’s negative business environment and the flight of well-heeled taxpayers out of the state led to less revenue. Apparently, only California officials couldn’t see that one coming.

But it’s more than that. If the deficit jumped $7 billion and $4 billion of that is attributable to diminished revenue, that leaves $3 billion in increased spending. Sure enough, we learn that “some previously agreed cuts to state social programs, including the Medi-Cal health care program for low-income families and seniors were either delayed by legislators or blocked by the courts and federal officials.”

The solution to this, Brown says, is to raise taxes. Naturally. The Los Angeles Times reports:

Jack Pitney, a political science professor at Claremont McKenna College, said the bad news about the deficit could complicate Brown’s push for higher taxes. He said voters may think, “You can’t even handle the money we’ve already sent you. Why should we send you more?” . . . .
Republicans blamed Democrats for predicting a $4-billion windfall in the current budget, which never materialized.
“The imaginary money the majority party counted on in last year’s sham of a budget never materialized, and they have refused to cut big government,” Assembly Republican Leader Connie Conway of Tulare said in a statement.
Senate Republican Leader Bob Huff of Diamond Bar said Democratic lawmakers should have reduced spending on welfare and other social services in March, as Brown requested. Democrats had hoped a rebounding economy would negate the need to puncture more holes in the state’s social safety net.
“By not enacting those cuts then, we can’t make them up now,” Huff said.
Senate President Pro Tem Darrell Steinberg (D-Sacramento) said he didn’t regret holding off on budget cuts earlier this year, even if it cost the state hundreds of millions of dollars

So, understand what is going on here. The state refuses to cut spending. The high tax and excessive regulation regime depresses economic activity (unemployment is 11 percent) and thereby lowers revenue. Democrats refuse to cut spending, so they seek tax hikes (bigger than would have been needed if they hadn't kicked the can down the road). And there is some mystery as to why California is sinking further into the red?

The parallel to the federal government (and to Greece) is obvious. Mitt Romney is asking if we are better off than we were four years ago. Maybe the right question is: Do we all want to be like California?

By  |  10:30 AM ET, 05/14/2012

Categories:  Economy, Taxes

 
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