 GOVERNMENT SPENDING "States' plights" California is not alone in its budget crisis; Colorado may have the answer.
Date: March 9, 2003
Section: Commentary
Byline: John Seiler
With all but three of 50 state budgets in deficit, California can learn some lessons on the right and wrong ways to deal with our own state's deficit.
One state -- Colorado -- is taking bold steps to avoid tax increases while initiating other measures to even out its budget crunch. Unfortunately, Nevada is going the opposite direction, reaching for the fix of new taxes, a dramatic departure for this low-tax state that will have lasting and severe effects on its business climate.
California's crisis is well known, with legislative analyst Elizabeth Hill pegging the deficit at $26 billion over the next 16 months and Gov. Gray Davis saying it could be $35 billion. For purposes of comparison among the states, in this article I'll refer to budget deficits as a percentage of the state general fund. I'll use fiscal years, which run from July 1 to June 30, instead of combining the remainder of the 2002-03 fiscal year and all of fiscal 2003-04 (except as noted).
For fiscal 2003-04, 36 states are projecting deficits, when combined, of $68.7 billion, according to a February study by the National Conference of State Legislatures. The deficit situation has worsened by 50 percent since last November, Arturo Perez, senior policy specialist at the NCSL, told me. Eleven more states also are in deficit, but haven't calculated how much. Only three states are in surplus.
He said last year most states dealt with 2002-03 deficits with one-time revenue fixes. For example, California shifted funds around and borrowed from future proceeds of the national tobacco settlement. But for fiscal 2004, he said, the states still in trouble are considering ''serious budget cuts, raising revenues, or both. The common phrase being heard around the country is, 'Everything is on the table'.''
Californians certainly have heard that from Gov. Gray Davis and legislators.
''The states are looking for any positive signs, such as increases in personal income tax collection, consumer confidence, consumer spending or positive gains in business confidence,'' Perez said. ''That's not happening. More of the same [economic bad news] continues. So that's not good for the states'' in these opening months of 2003, with next year's budgets due by mid-year.
Federal considerations
Actions by the federal government in its fiscal policy naturally also significantly influence the fortunes of state economies and governments. The major factors are the stimulus to the economy of President Bush's proposed tax cut; and whatever effect, good or bad, a possible invasion of Iraq would have on the economy. War certainly would increase the federal budget deficit, already pegged at $300 billion for fiscal 2004, but could steady stock and oil markets.
In general, the national economy, as measured by the gross domestic product, is one of four key influences on the California economy.
Davis and other governors have been pleading with the federal government to help the states with their budget deficits, for example by taking over more spending on medical care.
But a study by the American Legislative Exchange Council found, ''There is ample empirical and theoretical evidence that suggests federal bailouts will not stimulate the economy, indeed they may retard recovery'' by slowing overall private sector growth to pay for government growth. Also, ''A federal bailout would aggravate or encourage 'rent-seeking' in state capitols,'' meaning states that spent too much, such as California, would be rewarded with money taken from states that were frugal and ran up surpluses, such as Iowa.
Federal bailouts of states are not a good idea. Californians got into this mess; Californians must figure out how to get out of it.
Rocky Mountain budget high
One state that's doing it right is Colorado. It also has a deficit, though one only about half as bad as our state's, proportionately speaking, for the next two years. Colorado's fiscal 2002-03 budget revenues are 13.2 percent short of the amount needed to meet expenditures. That's higher than California's 11 percent gap between its revenues and expenditures for fiscal 2002-03.
But for fiscal 2003-04, Colorado's budget gap drops to 6.5 percent of a $6.1 billion budget while California's soars to 30 percent of a $75 billion budget.
''Right now, the Legislature is working on $800 million in cuts,'' Dan Hopkins, press secretary to Colorado Gov. Bill Owens, told me. ''Next year, the same amount.''
Colorado also has a special weapon: The Taxpayers' Bill of Rights, which voters passed in 1992. As with the Gann limit, which California voters unfortunately mostly got rid of in 1990 with a ballot initiative, it allows state spending to grow only at the rate of population growth and inflation. Unlike Gann, it allows state tax increases only with voter approval.
''It's a good fiscal management tool,'' Hopkins said. Colorado expects to be out of its fiscal problems in two years.
California Assemblyman John Campbell, R-Irvine, has proposed restoring the Gann limit. State Sen. Tom McClintock, R-Simi Valley, pointed out that if the Gann limit had remained in place, ''Instead of a $35 billion deficit, California would enjoy a $5 billion surplus this year -- and $30 billion cumulatively over the last four.''
Rolling budget snake eyes
Nevada is taking a different approach, one more hazardous to its economy and long-term financial health. The gambling state long has enjoyed the reputation as something of a tax haven. But that could change, especially for businesses that have located there because of its low taxes on companies and lack of an income tax. (''And in fact, Nevada has gleefully celebrated this 'low tax' reputation,'' writes Las Vegas Review-Journal columnist Vin Suprynowicz. ''The toll-free phone number of the Nevada Development Authority is ... 1-888-4-NO-TAXES.'')
But recent spending binges have led Gov. Kenny Guinn to call for $1 billion in tax increases for the 2002-03 and 2003-04 fiscal years. Adjusted for population, that's equivalent to $8.3 billion in California -- exactly the amount called for here by Gov. Davis.
Suprynowicz quotes Cort Christie of Nevada Corporate Headquarters, a business consulting firm. Christie said, ''You're creating an IRS or a franchise tax board in Nevada, complete with reporting and audit requirements. This will no longer be an easy state to get started in. ... At that point Nevada changes. Psychologically, you're no longer a 'business-friendly state,' but a 'business tax state'.''
What's next for California
The states in America's federal system are supposed to be the ''laboratories of democracy.'' Each learns from the wisdom, or folly, of the others. We've seen that with the budget crises of past years.
For California, it's clear that the Colorado model is the way to go: Balance the budget with spending cuts and not tax increases, restore the Gann limit, then go for the final prize, mandating a statewide vote for any tax increase. If the Rocky Mountain State can do it, so can the Golden State.
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