From today’s Wall Street Journal Political Diary E-mail…

Arnold Wins a Round

SAN FRANCISCO — Arnold Schwarzenegger won his biggest victory ever as governor of California as he rolled over Democrats in the legislature and won significant budget cuts to balance a budget with a $26 billion hole. Because the state is nearly a month into the fiscal year without a budget, the California government has issued just shy of $700 million in IOUs — thought to be an all-time record. The suddenly tight-fisted governor scored an improbable knockout punch against Democrat Karen Bass, the Assembly Speaker, and her liberal allies in Sacramento. The budget imposes $9 billion in education cuts and several billion in Medicaid cuts — reductions that would have been impossible three months ago. "No doubt about it," says Jon Fleischman, who writes Flash Report, a conservative political newsletter in California, "Arnold has been winning this budget war."

The spending constituencies are furious with this turn of events. Public-employee unions opposed a short-term tax increase fix that was put on the ballot in the spring, because they didn’t want the new spending cap that would have come with it. Union opposition to that deal has thoroughly backfired as the final budget resolution has demonstrated. The long pampered public employee unions, for the first time in anyone’s memory, got clobbered in this fight. Bravo, Governor.

But while Mr. Schwarzenegger has won this fiscal battle, some conservatives worry next year’s will be even uglier because of the lack of any structural changes to the budget or tax code. Assemblyman Mike Villines, the former minority leader, tells me: "We’re going to have continual budget problems next year and in all the future years. Most of the savings this year, come from one-time savings and gimmicks." Mr. Villines sees another $26 billion deficit in 2010-2011: "California’s budget remains a mess that no one will clean up."

A quick look at this year’s budget fixes suggest Mr. Villines is right. The biggest savings so far have come from worker furloughs and the age-old gimmick of shifting hundreds of millions of dollars of state payments from one fiscal year to another. The income and sales tax increases enacted earlier this year are temporary and so after 2011 they go away. Mr. Schwarzenegger has vowed "not to kick our budget problems down the road," but in part, that is what this budget does.

The long-term fiscal prognosis for California remains bleak. The state has a permanent $20 billion to $30 billion hole in its budget caused mostly by tax and regulatory policies that have chased rich people out of the state. Mr. Schwarzenegger said recently that California collects "half its revenues from the richest 1% of earners in the state. We believe this is the highest percentage of any state." So Arnold has won Round One, but if he doesn’t fix the tax code, the golden state will soon look like the Michigan of the West Coast.

— Stephen Moore

This entry was posted on Tuesday, July 21st, 2009 at 12:00 am and is filed under Blog Posts.