Who is to blame on California's budget crisis?
www.chinaview.cn 2009-07-06 17:51:18   Print

    LOS ANGELES, July 5 (Xinhua) -- As California has to operate on IOUs after failing to solve the budget crisis, Californians are asking who is to blame on all those problems facing this Golden State, a leader in the U.S. economy.

    Governor Arnold Schwarzenegger, himself a Republican, blamed Democratic state legislators on failing to make necessary spending cuts.

    But Democrats attacked Republicans and Governor Schwarzenegger for their refusal to raise taxes as a way to get new revenues. They also criticized Republicans for cutting services to the poor and needy, such as social services, health care and welfare for the poor, senior and disabled.

    If the governor had the money, he would certainly not ask for any spending cuts. But the problem is, the state government can get no new revenue if raising tax is not an option.

    It seems that the governor, both Republicans and Democrats in the state legislature are to blame. But some analysts say that voters in California are to blame too.

    Schwarzenegger was elected governor in 2003 after former Governor Gray David, a Democrat, was ousted in a recall campaign following a state budget crisis. Schwarzenegger promised voters he would fix the state's broken finances.

    Schwarzenegger knew why Davis was ousted because voters in California did not want more taxes. So he took the easy way out by cutting taxes by billions of dollars, backing off a tough spending limit, unilaterally adding spending to placate Democrats and blowing through a one-time surge in revenues.

    After he took office, Schwarzenegger sought and voters approved a 19 billion dollar bond issue that allowed the state to borrow heavily just to meet its annual operating expenses. Now the state has to pay the principal and interest of the bond.

    He also put a vehicle license fee cut of 6 billion dollars to make the voters happy. But soon in February this year he had to partly restore the revenue by temporarily raising the vehicle license rate from 0.65 percent of a vehicle's value to 1.15 percent.

    About 55 percent of California's general fund revenue comes form the personal income tax. The state depends heavily on the very rich to pay taxes. The top 5 percent of all income earners combine to pay 68 percent of income taxes.

    But the very rich are largely dependent on capital gains for incomes, which are most commonly realized through the sale of real estate and stocks. Tax revenues from capital gains have virtually disappeared following the crash of both the real estate and stock markets.

    Another reason is the failure of the governor and the legislature to cope with the dramatic drop of revenue after the bubble in Silicon Valley burst.

    During the late 1990s, revenues soared as California benefited more than any other states from the tech-stock boom that was centered in the Silicon Valley. But the state spent billions expanding and creating state programs and passing out billions more in permanent tax cuts.

    When such revenues dried, the state still refused to raise tax or cut spending as most of the U.S. states did during the 2002 recession. Instead, California relied heavily on borrowing and accounting maneuvers to balance its budget.

    Traditionally, Democrats are supported by unions and other civil rights organizations. Schwarzenegger accused Democratic lawmakers of ignoring "waste, fraud and abuses" and said that Democrats are "just beholden to the unions and the special interests."

    The governor also tried to shift the blame on the Democrats alone by saying that "the legislators' failure to act on those proposals sent a message to the California voters and to the taxpayers that says we want you to make the sacrifices but we in Sacramento don't want to make any sacrifices whatsoever."

    "Protecting the special interests who benefit from our dysfunctional system was more important to the Legislature than protecting the taxpayers and dealing with the entire 24 billion-dollar deficit," he added.

    Democrats are the majority in the California legislature. In normal conditions, it is easy for the Democratic controlled legislature to pass their version of budget. But California is one of the three U.S. states which require that the state budget should be passed with two thirds of majority, not simple majority. Republicans make use of the situation to kill any budget they disagree with.

    While saying the state legislature is to blame, some Californians also blame the voters. In 1978, Californian voters passed Proposition 13 to cap property taxes at 1 percent of assessed value and mandated that increases would require a two-thirds majority at both the state and local level. That proposition greatly limited the state's ability to get more revenues.

    That can explain why the Golden State has no money to support its welfare and social services.

    The California education system has deteriorated to the point where it is now ranked 47th in the United States. For the past 30 years, governors and legislators have tried to keep California's financial house together by a series of tricks, most often borrowing in anticipation of future revenues. That worked as long as the California economy was strong, but the recession drove California to the verge of bankruptcy.

    It seems that the California budget crisis is mixed with impacts of the recession, the struggle between legislators from different parties, structural problems of the state legislature, decisions from the voters and ability of the governor to lead.

Editor: Wang Yan
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