In 1967, when Ronald Reagan became Governor of California, he learned that his predecessor, "Pat" Brown, had been using 15 months' worth of revenue to pay 12 months of the state's bills in order to meet the state constitution's balanced budget requirement. Reagan decided that a tax increase was needed to straighten out the situation. He said at the time that as soon as it was corrected he would give back any surplus to the taxpayers.
Toward the end of the next fiscal year his Director of Finance, Caspar "Cap" Weinberger (later U.S. Secretary of Defense to President Reagan), came to his office one day with the news there would be a surplus. As Weinberger recalls it, "I wanted him to know about this first, because as soon as the legislature knew about it they would have all kinds of ideas on how to spend it...I asked him what he wanted to do about the surplus. He said, 'Let's just give it back.' I said, 'Well, it's never been done before.' 'No,' he replied, 'but then you've never had an actor for governor before, either.' So we gave it back."
At the time he proposed the refunds voices were raised in the legislature (controlled by the Democrats). One state senator thundered that this would be "an unnecessary expenditure of public funds." Another said, "It would cause fiscal chaos" (which he pronounced "chowse").
Reagan knew what many politicians choose not to know: that it's taxpayer money which runs government; not government's money, some of which taxpayers are permitted to keep. By the time he left office eight years later, Reagan had given back more than $5 billion (in 1974-75 dollars) to the state's taxpayers, in refunds, reductions and reduced license fees and tolls.
Forward to the beginning of 1999. Gray Davis becomes Governor, inheriting a state surplus from his predecessor, Republican Pete Wilson. Does he celebrate by giving it back to the taxpayers or, at a minimum putting it away in a "rainy day" fund as a hedge against such things as the electrical power crisis that soon beset the state? No. After all, "tomorrow" looked rosy -- at first. Revenues were increasing, so Davis proposed various expenditures, most of which he said would be one-time only. Of course, all became embedded in the budget apparatus. The interests that had clamored for them and the bureaucrats whose jobs depended upon their continuous growth saw to it that they increased in every succeeding year. Is this surprising? As P.J. O'Rourke once said, "Giving money and power to government is like giving whiskey and car keys to teenage boys."
Since 1998-99, California's revenues have increased 28 percent, but state spending has gone up 36 percent. While an economic slowdown gets some of the blame for less revenue than expected, Davis and his Democratically-controlled legislature have only themselves to blame for the $34.8 billion deficit they face. Davis professed surprise to learn that it had gone from $21 billion just before his November election to $34.8 billion in December. That $34.8 billion, by the way, exceeds the annual budget of every other state except New York! What do the people of California think of these figures? The latest poll has 61 percent of Californians giving Davis an unfavorable rating.
Davis and his legislative colleagues, fearful of disappointing the axe-grinding interests that filled their campaign coffers, are talking tax hikes instead of cost reductions. They'll have plenty of help. For example, the executive director of the California Association of School Business Officials said the other day, "There is absolutely no way you can grapple with a deficit of this magnitude without talking about some pretty serious tax hikes." Oh yeah? State Senator Tom McClintock, a Republican, says that 9.5 percent reduction in spending, kept in place for 18 months, would plug the deficit hole.
The Republicans, though they are in the minority in both houses of the legislature (they did increase their numbers slightly in the recent election), hold more than one-third of the seats. Thus, they can prevent the Democrats from getting a two-thirds majority needed to pass the state's budget. That is leverage worth having.
What should Davis do -- but almost certainly will not? First, admit his mistake in failing to curb spending when he saw lower revenues ahead. The public can begin to forgive a repentant sinner. Second, cut his second inaugural "celebration" to the bone, to nothing but the swearing-in ceremony and a modest tea-and-cakes reception afterward (he's been hustling contributions of up to $50,000 from the usual suspects for a "gala"). Third, adopt the McClintock spending cut-and-freeze plan. Who knows, if he did all those things he might get the credit for beginning a major turn-around and might even find himself able to rescind his pledge to sit out the 2004 presidential election.
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