California Governor Signs Balanced Budget with No New Taxes

Published September 1, 2004

The state of California has a no-new-taxes budget in place for the coming fiscal year. Republican Governor Arnold Schwarzenegger reached agreement with legislative leaders on July 26, and on July 27 he signed into law the new $105 billion budget.

“This is the greatest birthday gift for me that I could have,” the governor said. “I celebrated … my 57th birthday, and here we have the budget.”

To eliminate a deficit projected earlier this year at $17 billion, Schwarzenegger and state lawmakers rejected tax increases but accepted borrowing, one-time savings, and roughly $5 billion in spending cuts. In California as well as most states, long-term borrowing is permitted to alleviate potential budget deficits, achieving a technically balanced budget.

Balanced Without Raising Taxes

“When I first presented my budget last January,” Schwarzenegger told the press, “I said that we have to have a responsible budget so that we can make California get out of the poorhouse and make it again a powerhouse. I said we need a budget that is balanced and one that does not spend more than the state takes in. I said we need a budget that makes reductions but protects essential services. I said we need a budget that moves us toward structural reform. And I said that we need a budget that does not raise taxes.

“Well, a few minutes from now I will be signing a budget that does all of those things,” Schwarzenegger said at the signing.

The signing took place at the State Capitol, where Schwarzenegger was surrounded by “representatives of law enforcement, local and state government leaders, and people gathered in the rotunda to see the event,” according to a release issued by his office.

“I want to thank the people of California because when our negotiations stalled, when the legislators started dragging their feet a little bit here, it was the people of California that started calling the legislators and saying, ‘Pass the governor’s budget.'”

Defending the Plan

“Because the Democrats didn’t get to raise taxes, they are now complaining that the budget borrows too much and creates large out-year deficits,” wrote Assemblyman Ray Haynes (R-Murietta) on August 13 for, a media watchdog site. “Their ‘out-year’ deficits were $48 billion. This governor reduced them to $4 billion, even with the Democrats’ spending demands. I believe that the end of next year’s budget process will eliminate that spending gap completely,” wrote Hanes.

“The governor kept his pledge to the people of California to pass a budget without new tax increases. This is a very good thing,” agreed Lawrence J. McQuillan, director of business and economic studies for the San Francisco-based Pacific Research Institute. “By holding the line on taxes, California will improve its position relative to other states and attract new people, new businesses, and new capital investment, spurring future economic growth.”

“We were able to produce a budget that I believe is fair,” Assembly Speaker Fabian Nuñez (D-Los Angeles) told Voice of America. “It’s not a perfect budget, but one that we can stand by in a bipartisan manner.”

“The downside of this budget,” noted McQuillan, “is that it did not correct the structural imbalance–multibillion dollar deficits are projected for the next few years.

“If the governor cannot convince the legislature to cut spending significantly, the only alternative is to grow our way out of this deficit problem,” he explained. “If that’s their approach, the legislature and governor need to do more to improve California’s business climate so that economic growth will fill state coffers. A lot of work remains to be done.”

Performance Review Up Next

“California’s government is still too big, too bureaucratic, and too unresponsive to the needs of its people,” agreed Hanes. “The governor, to address those problems, has proposed the California Performance Review. The group’s report calls for sweeping reform that could save the state as much as $32 billion over the next five years.”

George Passantino, director of government affairs at the Reason Foundation in Los Angeles, said, “The first Schwarzenegger budget accomplished the all-important goal of holding the line on taxes. In fact, by reducing the Car Tax, Schwarzenegger actually reduced the tax burden for Californians when he was told it could not be done. At the same time he launched the most ambitious effort to overhaul California state government with his California Performance Review.

“But the State is not out of the woods yet and needs fundamental reform,” Passantino continued. “California still suffers the lowest credit rating among states in the nation. A multi-billion dollar deficit awaits lawmakers when they return next year. Each day that passes without fundamental reform, California digs itself into a deeper hole. It may well require, as Schwarzenegger has suggested, that fundamental reform will have to occur at the ballot box.”

John Skorburg ([email protected]) is managing editor of Budget & Tax News.