The California and U.S. economies are facing daunting challenges not seen since the early 1980s.

According to the latest figures available, California's unemployment rate just reached 10 percent, and it will get worse before it gets better. California's Legislature just adjusted its current budget and included next year's budget in an attempt to close a projected $42 billion deficit over the next 16 months.

Unfortunately, the budget fix will prolong the recession because it imposes the largest tax increase in California history.

Californians should also be prepared for additional budget cuts this year, as projected tax revenues will not be reached. To add insult to injury, the budget deal includes a ballot initiative, Proposition 1A, that gives voters a Faustian bargain. If the voters vote for Proposition 1A, they will place a weak spending cap on government while keeping higher taxes for four years. If they vote "no," the higher taxes will only last for two years, and there will be no spending cap.

Given these dire circumstances, what is the correct path to economic growth, private-sector job creation and government reform? A review of the current California tax increases coupled with President Barack Obama's schizophrenic combination of tax increases, tax cuts and massive growth of government spells disaster for Californians.

The average California family of four, earning $50,000 a year, will see its state taxes increase by approximately $1,000 a year while Obama's federal tax cut will reduce the same family's taxes by $1,000 a year.

For Californians, it is a zero-sum game.

Where is the economic relief? California is the largest economy in the nation, but it's getting no benefit of the federal tax cut. Instead, California is getting a one-time allocation of money to expand government programs. What happens when the federal dollars dry up? Who picks up the tab? It has to be the taxpayer – hang on to your pocketbook!

The trillions of dollars Obama is spending to stimulate the economy will shrink the amount of capital available to businesses to grow and create new jobs. The huge amount of borrowing by the federal government for the stimulus will also ramp up inflation.

Could California and the nation be returning to the stagflation (high unemployment combined with high inflation) of President Jimmy Carter's recessionary economy? A different path must be taken by California and the nation to turn around the economy.

President Ronald Reagan provided a successful path. Reagan faced an economy similar to what Obama is facing and yet took a completely different approach. He faced a "malaise" of the American economy and spirit due to a very painful recession.

Interest rates were at 20 percent, inflation was at 13.5 percent, and unemployment was at 11 percent. Reagan proposed a more open, free economy that trusted the people and not anonymous government bureaucrats.

Reagan cut taxes across the board, and the economy boomed. This boom was best described by the late Robert Bartley, formerly the editorial page editor of the Wall Street Journal, in his book "The Seven Fat Years." Here are the results of Reagan's booming economy:

• 18 million jobs were created.

• The tax burden was reduced from 70 percent to 28 percent.

• Tax revenue to the U.S. Treasury doubled.

• The gross national product doubled.

• Real disposable income per capita grew 18 percent.

• Manufacturing production grew by 48 percent.

• Exports grew 92.6 percent.

• Nonfarm productivity grew 10.6 percent.

• Charity grew at 5.1 percent a year, compared with 3.5 percent over the previous 25 years.

What California and America really need is exactly counter to what Obama and Gov. Arnold Schwarzenegger are doing. Now is not the time to increase taxes but rather to cut income, corporate and capital-gains taxes while reforming government.

Tax cuts coupled with reduced regulation and reinvention of government services are what California and the nation need to produce the golden luster of hope for our children, the state and the nation.

Assemblyman Ted Gaines, R-Roseville, represents the 4th District.