Schwarzenegger Inherits Huge Budget Challenge

Published December 1, 2003

The ongoing California budget problem presents one of the toughest fiscal challenges any American state has ever faced. Arnold Schwarzenegger, the beneficiary of Californians’ recall of Gray Davis, carries a clear mandate to fix the state’s finances. But it will take the strength of Atlas to bear that burden.

Making a Mess

How did California get into its mess? Stephen Moore, president of the Club for Growth and previously a budget analyst for the Cato Institute, says California is in a “depression” and lays the blame mostly at the feet of Gray Davis.

“Although the bursting of the high technology bubble contributed,” Moore acknowledges, “Davis bloated the state budget, raised taxes repeatedly, passed scores of new business regulations, badly fumbled the electricity crisis, converted the governor’s office into a campaign financing operation, and allowed the leftists in the legislature to rule the roost.”

John Berthoud, president of the National Taxpayers Union, blames government over-spending for California’s fiscal disaster. “From 1990-2001, real per-capita general fund spending rose by 26 percent. In other words, for every dollar that the state was spending per person in 1990, just 11 years later it was spending $1.26–and that’s above and beyond increases for inflation.”

Moore adds that Schwarzenegger will “inherit a $100 billion budget that has grown by nearly 40 percent in the last five years.” Moore also points out that California’s business climate is notoriously hostile to entrepreneurs, pointing to requirements like domestic partner employee benefits and hiring protections for cross-dressers.

The new governor agrees the California budget is a mess. “It’s disturbing to realize that after taking a close look at California’s budget, it’s hard to make any sense out of it,” Schwarzenegger said.

“In Sacramento, spending is out of control and as governor, I will work to get the state’s fiscal house in order,” he pledged. “Immediately upon taking office I will order an outside, independent audit of the state budget so we can get a clear picture–uncluttered by politics and special interest influence–of how we can bring spending under control without neglecting our most important obligations.”

Cleaning Up

Schwarzenegger wants to rein in spending by adopting a strict spending limit; going after waste, fraud, and abuse in the state budget; and restructuring some of the state’s debt.

Moore agrees with the idea of a state spending cap, noting it is a vital reform. “If taxes and outlays had risen only as fast as inflation and population growth since 1990,” Moore notes, “the average California family would be paying some $2,000 less per year in state-local taxes today and the budget would be balanced.”

Moore also suggests the adoption of a California flat tax. “At 9.3 percent, the top tax rate on businesses and workers is the third highest in the nation. This has driven employers and high-wealth individuals from the state to places like Nevada and Washington that have no income tax. A 6 percent flat rate income and sales tax will bring some of those job-producers back.”

Fixing the workers compensation system is also on Schwarzenegger’s agenda. California spends $80 million per 100,000 workers on workers compensation costs–dramatically more than is paid by neighboring states. To solve the problem, Schwarzenegger proposes to end “the incentives and loopholes that encourage unscrupulous lawyers and providers to game the system.”

Under Pressure

Battle plans, however, rarely survive contact with the enemy. Can Schwarzenegger rein in spending, adopt a spending cap, cut waste, fraud, and abuse, and reform workers compensation in a legislature dominated by Democrats?

“Governor-elect Schwarzenegger will face great political difficulties achieving his goals in the highly partisan California legislature,” said Berthoud. “A majority of members in both houses are supporters of bigger government and most members are in safe seats. This means few of the pro-spenders have any reason or incentive to bend their views, even in the face of the anti-tax message state-wide in the recall election.”

“Schwarzenegger must go to war against the Democratic-dominated legislature,” commented Moore.

Schwarzenegger himself takes a more accommodative approach, stressing he wants to be governor of all the people. “I want to be the people’s governor. I will work honestly, without fear or favor, to do what is right for all Californians.”

A tall order, especially given the composition of the California legislature. If he succeeds, though, Moore says Arnold “has a chance to put the bloom back in the rose in the state that was once California.”

Chris Atkins is director of tax and fiscal policy for the American Legislative Exchange Council. His email address is [email protected].