Is a well-written spending cap worth extra years of tax increases? That is the question that confronted our legislators and now confronts every California voter. The deal that was pushed by the Governor was to re-enact a spending cap as good as or better than the original Gann spending limit of 1979. For a variety of reasons, I conclude that this has been achieved. Once in place, this spending limit could be changed only by the voters, although I fully expect future governors and legislators to search for every loophole.
This spending limit will not cut taxes. In fact, passage of the measure is linked to extensions of the new tax increases on sales (though 2012), income (through 2013) and cars (also 2013). Can California’s economy survive more years of our being the state that is the least competitive and most hostile to new jobs in the nation? I know it will exacerbate the suffering of unemployment and failing businesses.
If this spending limit succeeds in containing spending, then the big budget battles still lie ahead. Future legislatures will be forced to repeal current spending formulas to be able to live within the proposed spending cap. Both the spending cap and the weak tax revenue will continue to restrain growth in California state and local governments.
Proposition 1A would require that general fund spending be capped at the actual tax revenues received on the average over the prior 10 years. I will be analyzing the actual impacts in future discussions of the proposition. Taxes received, if any, over this number will go into a reserve. The reserve will grow until it reaches 12.5% of the general fund, which today would mean roughly a $12.5 billion reserve. Spending from this reserve would be limited to emergency natural disasters. The sad news for big spenders is that they will have to cut state programs for lack of spending authority while billions sit in an emergency reserve fund.
Once the reserve fund is filled to 12.5% then any additional revenue received can be used for a limited list of one-time purposes (e.g., paying off debt, building state public works) or in tax reductions. With all of these requirements the state will never have a future surplus and therefore there is very little likelihood of ever having broad-based tax cuts enacted by a future legislature. This is sad news for the tax cutters, including me, who know that California is not competitive with the rest of the nation when it comes to taxation.
Those who concocted the deal must have thought that by tying the passage of the spending cap to more years of increased taxes that the liberals would come aboard. They are mostly wrong. The liberals are opposing the measure anyway. But this same deal has put conservatives in a dilemma because even though we are already stuck with higher taxes for two years, the passage of this measure would change the law to higher taxes for five years.
