The structural revenue shortfall ends because Republicans have been thrown out of government
This week’s big news is the announcement from Governor Jerry Brown that the state budget is out of perennial deficit and looking at several years of surpluses. Over the weekend we’ll talk more about what those surpluses mean and how they ought to be used. But today it’s worth taking a moment to remember how we got here.
Since 2001 or so, California’s budget seems to have been in perpetual deficit, with less money coming in than was needed to fund existing public services. While the deficit pressure eased in 2005-06, that didn’t last, and by the summer of 2007 the deficits had returned as the housing bubble popped and the country slid into the worst recession in 60 years.
Republicans and many of their media enablers claimed this was due to Democrats “overspending” and that the only solution was massive austerity. Thanks to the rule requiring a 2/3 vote of the legislature to pass a budget, Republicans were able to force Democrats and the state to accept this argument, and from 2007 onward state budgets included brutal cuts to health care, education, transportation, local governments, the courts, and other things that are necessary to keep California functioning as a 21st century society.
But those right-wing claims were never true. In fact, they were little more than deflections from the truth – that the deficits were caused by Republicans themselves and their anti-tax ideologies.
The story began in 1978 with the passage of Prop 13, but this particular chapter’s true beginning came in 1996. During the 1980s state government had cobbled together an unwieldy but workable fix to the devastation to revenues and public services that Prop 13 had wrought, aided by that decade’s economic boom. The ’80s economic expansion was unsustainable, rooted in weapons, finance, and housing. By 1991 it had all come apart. Once again, the state government cobbled together solutions, as moderate Republicans and Governor Pete Wilson joined Democrats to pass a mixture of spending cuts and tax increases. By the middle of the 1990s the state budget had stabilized, and surpluses were projected for the first time in years.
But California was also undergoing historic political change. In 1992 the state flipped from red to blue in the presidential election for the first time in many decades. Republicans in 1994 won a tenuous majority in the Assembly by stoking white resentment at the rising Latino population, but this was only a temporary win. They needed something else that could stem the rising Democratic tide.
Republicans figured the answer was to fan the flames of the tax revolt. The first step came in 1996 when Proposition 218 was placed on the November ballot. This measure required a 2/3 vote of the people to raise most local taxes, setting up widespread municipal financial woes in the coming years.
But their main thrust came in 1998. As the dot-com boom gathered pace, the state had huge budget surpluses. Rather than use the surplus to fund new programs or new capital investments, Republicans, worried about their fortunes in the 1998 statewide races, decided it was time for a huge tax cut. Democrats, eager to appease the tax revolt, went along.
The result was the creation of a structural revenue shortfall. Rather than a one-time tax rebate, tax rates were permanently lowered. The consequences became clear in 2001 when the country entered recession. As tax revenues declined, it became clear that the 1998 cuts had gone way too far, and Governor Gray Davis found himself short nearly $30 billion in revenue.
Republicans had engineered a crisis. Now they took advantage of it to reclaim power, pushing through the recall of Governor Davis in 2003 and replacing him with Arnold Schwarzenegger. There were many issues driving the 2003 recall, but in many ways this was the final triumph of the tax revolt. Schwarzenegger ran against the restoration of the vehicle license fee to the levels it had been at from the 1940s to 1998, and blamed the state’s budget woes on overspending.
Once in office, he refused to consider new tax increases even though economists suggested he do so, and instead borrowed money to cover the shortfall. He also pushed through, with Democratic support, a new cut of the VLF, creating a $6 billion hole in the state budget that was only filled last November by the passage of Prop 30.
The underlying structural revenue shortfall never went away. When the housing bubble burst and the nation slid into recession in 2007 (California got there a few months earlier) the revenue shortfall problem was again revealed. And again, Republicans demanded and won not just more spending cuts, but also more tax cuts. Even as billions were being cut from schools, Republicans leveraged the 2/3 rule for passing budgets to win new corporate tax loopholes. California became a laughingstock, a national poster child for supposed liberal fiscal excess.
By 2009 Democrats finally agreed with what we progressives had been saying for years: that the only way to fix the state’s financial woes was not to cut spending, but to take power away from Republicans. On New Year’s Day 2013 I described how this was done. In 2010 Prop 25 passed, ending the 2/3 rule and eliminating Republican power over state budgets (though not yet over tax increases). That same year, Democrats swept all statewide offices, including retaking the governor’s mansion. In 2012, Democrats went further, winning a 2/3 supermajority while also ending the structural revenue shortfall with Prop 30. They even managed to close the corporate tax loopholes created in 2008, with Prop 39 passing by a healthy margin.
Yesterday we saw that elections have consequences, as Governor Brown announced the end of deficits and the return of surplus. It is not a coincidence that this happened after Republicans were kicked out of state government and after the tax revolt was ended. California’s fiscal woes were a direct result of Republican policies, and now that the Republicans are gone, so too are the structural deficits.
That’s not to say all is rosy. California still has widespread unemployment. The safety net and public schools have been shredded by 30 years of low taxes, and in particular by the Republican-driven austerity of the late ’00s. California has a lot of spending needs in the coming decades in order to build a sustainable society and to address global warming, as well as to finally overcome a century and a half of inequality.
But it is possible to begin solving those problems now that the Republican Party has been destroyed and the state budget crisis has ended. California has a future again – if the supermajority decides to start building one.