Peter Schrag: Message to the politicians: Get real on the budget

You don't have to read between the lines of Legislative Analyst Elizabeth Hill's "Alternate Budget" to understand its basic message: The governor couldn't have been serious in his own budget proposals.

The governor's plan, she said, "reflects little effort to prioritize and determine which state programs provide essential services or are most critical to California's future. In doing so, the administration has shifted much of the responsibility for crafting a workable budget to the Legislature."

The fiercely nonpartisan LAO is supposed to analyze, question, suggest. An alternate budget that includes revenues increases is unprecedented. It says: If you can't do it, let us show you how. If the Legislature were controlled by the current crop of Republicans, she'd probably be looking for a job.

Predictably, much of the attention went to Hill's tax heresies. She actually proposed increasing revenues, largely by closing some $2.65 billion in what she regards as unproductive or unjustified tax loopholes.

She studiously avoided any mention of restoring the cut that Gov. Arnold Schwarzenegger made in 2003 in the VLF, the vehicle license fee, which is now costing the state some $6 billion a year. If it were restored, or if it had never been cut, most of the deficit would disappear in two or three years, or would never have existed in the first place.

Nor does she touch the thorny issue of broadening the sales tax. Because of the major shift from goods to services in the state's economy, the tax as a share of personal income is now about 30 percent lower than it was in the early 1960s and far less than it would be if major services were covered, as many people have proposed.

The conventional argument is that if the state had more money, it would spend it and we'd still have a deficit. But much of that spending is within the governor's control. What isn't – particularly the Proposition 98 school funding formula – was imposed by the voters themselves, and they've refused to change it. (In addition, Schwarzenegger himself helped lock in hundreds of millions more in spending with his 2002 pre-school initiative and with the deals he made on gasoline sales tax revenues).

As expected, Hill's "Alternate Budget" immediately took shots from the administration and from anti-tax conservatives. "Californians already pay enough taxes," said Assemblyman Roger Niello, R-Fair Oaks.

"It's not appropriate to ask taxpayers to bail out Sacramento for our spending problem," said Schwarzenegger's finance director, Mike Genest.

Despite those jeers, there's at least the possibility that the governor may welcome Hill's heresy as much as he deplores it. From the start, his unrealistic across-the-board spending cut proposals sounded more like an attention-getter than something he ever wanted, or expected, to get enacted. Is he looking for cover to raise revenues?

In substance, Hill's budget was very much in character. This was a balanced proposal that made plain that some of the governor's proposed cuts were unnecessary and that, on the whole, cutting everything across the board, while hinting at "fairness," made little sense.

Some examples: There's no need to close parks, as the governor proposed; a better course is simply to raise fees. Similarly, she calls for targeted reductions in school programs that, in the LAO's view, "are poorly structured, duplicative or technically overbudgeted."

She would suspend cost-of-living increases, give districts more flexibility in spending categorical funds – funds allocated to specific services – and through shifts in various accounts substantially make cuts that are significantly smaller than those proposed by the governor.

Conversely, she questions the governor's proposed rate reductions for Medi-Cal providers because they could "severely limit access" to doctors.

Hill's proposals fall between the realities of good policy and the politics of the possible. They are at least a subtle reminder that in similar past crises, Republican governors addressed multibillion-dollar deficits through a combination of spending cuts and tax increases. Govs. Ronald Reagan and Pete Wilson were not locked into the rigid no-tax orthodoxies of those now claiming to be the bearers of their legacy.

Nonetheless the Hill proposal is remarkable both for its courage and its modesty. Virtually all the revenue increases Hill proposes are, in fact, reductions in "tax expenditures," breaks for certain classes of taxpayers.

Part of the prevailing mythology is that California has a spending problem, not a revenue problem. But of course it has both. The state's commitment to backfill funds that local governments lost when the governor chopped the VLF appear on the budget as an expense. That expense wouldn't exist if the car tax were still in place. So does that make it a "spending" problem?

Nor is California a high-tax, high-spending state. Depending on how you count, California falls somewhere between 18th and 21st among the states in the percentage of personal income devoted to public spending. So that again raises the critical question: Do we want to be good or do we want to be cheap?

About the writer:

• Peter Schrag can be reached at Box 15779, Sacramento, CA 95852-0779.