Californians Draw a Line

National Review Online
Thursday, May 21, 2009

Tuesday night was tough for Sacramento: State lawmakers were handed a decisive defeat as voters rejected a series of ballot initiatives that would have allowed lawmakers to raise taxes and raid designated state funds to close a massive hole in the budget. Now the state legislature must work with Gov. Arnold Schwarzenegger to craft a budget that reduces spending to levels that neither wants to accept. Their only alternative is to beg President Obama for a bailout on top of the stimulus funds Congress has already approved.

Proposition 1A offered the carrot of a spending cap in exchange for the stick of more than $16 billion in tax increases. Voters realized, however, that the spending cap was toothless, designed to allow lawmakers to forgo meaningful cuts. Voters also rejected propositions that would have allowed lawmakers to borrow against the lottery and to take money from specially designated education and health-care funds. The only proposition voters supported was a measure forbidding lawmakers from raising their own pay during deficit years.

The rejection of further tax increases appeared to have the positive effect of forcing the Obama administration to abandon its threat to withhold California’s stimulus money if the state cut the pay of home health-care workers. The workers in question belong to the Service Employees International Union, a major contributor to Obama’s campaign, and the administration had been hinting for weeks that any move to cut their wages would have consequences. The day after voters rejected the ballot initiatives, however, the administration announced that it would not withhold the money.

Perhaps the administration realized that even with the relatively small budget cuts the state legislature is willing to countenance, California might be in imminent danger of defaulting on its debt. Yes, Schwarzenegger will work with the state legislature to make more cuts, but the deficit they are trying to close is enormous — $21.3 billion — relative to lawmakers’ willingness to scale back state spending. From their point of view, it might just be easier to get in line for a federal bailout; unfortunately, it is hard to see Obama rejecting their petition.

A federal bailout for California would do for the states what the feds’ implicit backing of Fannie Mae and Freddie Mac did for the financial sector — create an unacceptable level of moral hazard that encourages every state to binge on unaffordable spending without raising taxes. Allowing California to default would carry the downside of making it more difficult for all state and local governments to borrow money — but maybe that’s not such a bad thing.

California has historically been a good place to start a tax revolt. The 1978 passage of Proposition 13, which mandated a two-thirds majority for any tax increase, prompted similar measures in other states and heralded the ascendancy of Ronald Reagan. But we doubt that the defeat of Proposition 1A signifies a similar sea change. For one thing, the top marginal income-tax rate in 1978 was 70 percent. Across the country, excessive taxation had strangled economic growth and contributed to stagflation. Now tax rates are low, but the government borrows and spends at unsustainable levels. Californians have voted down a tax increase, but that won’t mean much if the state just borrows the money from Washington, which in turn borrows it from somewhere else.

It is good to see that Californians still have a strong aversion to tax increases, just as it was good to see so many people attend anti-tax tea parties across the country last month. But we have yet to see a true revolt against the endlessly growing size and scope of the government, and we are unlikely to see such a thing until necessity compels us to start paying for the government we have.