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Dan Walters: Davis' version of budget crisis doesn't square with history Davis' version of the crisis portrays the state treasury as the victim of a sudden, steep and unanticipated economic nose dive that slashed revenues and threw the budget into imbalance. "Over the past four years," Davis said in January as he submitted his budget, "working together, we have made critical investments in improving education, protecting public safety, expanding access to health care and providing taxpayers with significant tax relief. "With the pace of both the national and state economies continuing to languish, and no significant rebound in sight, California has experienced the most dramatic decline in revenues since World War II ... ," Davis said. When Davis unveiled a revised budget in May, he also issued a revised version of his message that an unanticipated economic decline created a deficit that he pegged at $38 billion. And he continued to beat that drum for weeks, until he finally signed a much-overdue budget that does little, if anything, to resolve the underlying crisis. The problem with the message is that it simply doesn't square with either the state of the economy or the historical record of what Davis and the legislators did. The undisputed fact is that after a severe recession ended in the mid-1990s, the state experienced a solid, if unspectacular, gain in tax revenues for four years before the highly volatile high-tech industry produced a spike in personal income taxes -- about 12 extra billion dollars -- that lasted just one year before revenues resumed their normal pattern of slow growth. When the extent of the windfall became known in 2000, Davis publicly -- and prudently -- declared that it would be a mistake to enact major increases in ongoing spending, or major tax cuts, and promised to resist them. But succumbing to pressures from both fellow Democrats and Republicans, Davis soon agreed to commit roughly $8 billion of the windfall to tax cuts or new spending. And when revenues did return to normal levels, the state was left with a "structural deficit" of roughly $8 billion a year -- one that will continue indefinitely. The mistake of enacting those unaffordable tax cuts and spending increases was compounded in the subsequent three years by budgets that papered over the deficits with creative, if misleading, gimmicks, raids on other state funds and loans of various kinds. But was it, as Davis said in his January message, the product of a languishing economy? California's economy has been a bit sluggish, but economists agree that its problems, whatever they may be, have been largely confined to the San Francisco Bay Area-centered technology sector and that overall, California's economy has been outperforming those of other states. "When the hard budget decisions must be made, the economy is often a convenient scapegoat, but in this case it's an inappropriate one," says a recent economic review by Santa Monica-based Straszheim Global Advisors, which cites a series of indices indicating that California has done no worse than the nation as a whole, and by some measures better. It describes California's worst-in-the-nation budget woes as "home grown," more political than economic. "The tech boom ... threw off a tremendous tax windfall which California's elected officials spent like an ongoing new revenue stream," the analysis continues. "The rest is budget trouble history."
In part, economists agree, California's budgetary problems stem from a volatile, income tax-centered revenue system that tends to push revenues sky high in good times and into a deep trough
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