Dan Walters: Fantasies and error abound on state budget

One of the more irritating aspects of the state budget wrangle – albeit also one of the more intriguing – is the sheer amount of factual error, historical revisionism, supposition and mathematical nonsense that sloshes around.

One might expect it on Internet battle sites and other forums patronized by members of the general public, perhaps – especially a public that, polls tell us, wants neither to make major spending cuts nor to shoulder more taxes to close the chronic budget deficit.

The ether is alive with fantasy-based "solutions" to the state's budget dilemma that utterly ignore the fact that the vast majority of the money in the state budget is actually aid to schools, colleges and local governments.

Nonsense, however, is less acceptable from politicians and budget interest groups that know better.

When Democratic legislators unveiled their newest version of the budget last week, including $8.2 billion in new taxes, it touched off new emissions, if not admissions, of erroneous verbiage.

Democrats howled that state-supported services could not sustain any more reductions and drew "a line in the sand." But neither they nor Gov. Arnold Schwarzenegger can adequately explain how the state's revenues could rise from $70 billion a year in 2003-04, when Schwarzenegger first became governor on a pledge to end "crazy deficit spending," to $100 billion today and yet the budget's deficit is much bigger. Where'd all that money go?

Democrats also claimed that by raising income taxes on those in upper income tiers, they were merely doing what Republicans, including then-Gov. Pete Wilson, did in the early 1990s when the state faced a budget problem that was, in relative terms, twice as bad as this one. So by their reckoning they're not raising taxes so much as restoring them to where they should be.

They neglect to add, however, that the taxes raised during that era, both income and sales taxes, were temporary whereas most revenue boosts the Democrats want this year would be permanent. And they also failed to mention that Wilson said later he regretted doing it.

Republicans, meanwhile, contend that despite the Wilson-era tax increases, state revenues declined, thus "proving" that raising taxes would worsen the economy. Yes, the 1990s recession did deepen and revenues did slide, but it's about 99 percent certain that there was no cause-and-effect relationship. It was the worst California recession in a half-century, and its primary cause was a collapse of the Southern California aerospace industry due to Pentagon spending cutbacks in the wake of the Cold War – cutbacks that were several times as large as the state tax increase.

Whether the state extracts a larger portion of the personal revenue stream and spends it or the money remains in private hands and is spent makes little economic difference. The money still circulates in the economy. Furthermore, the $8.2 billion is a tiny fraction of the eighth-largest economy in the world, only about one-half of 1 percent of Californians' personal income.

Would it then lead, as critics contend, to high-income Californians fleeing to states with lower or zero income taxes, such as Nevada, rather than pay their new levies? A few might, but those affected are a tiny number of very high-income taxpayers, and the new state taxes would be deductible on their federal income tax returns, reducing the net bite by about one-third.

There is a legitimate criticism of raising income taxes on the wealthy – that it increases the state's dependence on a relatively volatile revenue source, which is deadly when combined with very rigid spending formulae.

But the notion that a relatively small package of taxes would have big economic impacts is pure sophistry – or cynical propaganda.

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• Call The Bee's Dan Walters, (916) 321-1195. Back columns, www.sacbee.com/walters.