Not-so-Golden State

Posted Dec. 12, 2008, at 5:41 p.m.

The crisis in California over that state’s $14.8 billion shortfall in the current fiscal year budget of $103 billion may provide a preview of what Maine state government will see over the next several months.

State government there has settled into a standoff. Republican Gov. Arnold Schwarzenegger supports spending cuts, coupled with a 1 percent sales tax increase. Democratic legislators agree with the tax increase proposal, but have fought spending cuts (though they agreed to some). Republican legislators adamantly oppose any tax hikes.

The cause of California’s budget crisis — and of similar shortfalls in 42 other states, including Maine — bears repeating. In a recession, people earn less — hourly workers see their schedules cut, the self-employed have less business revenue, and even those whose paychecks remain steady are not getting raises, which means their wages are not keeping pace with inflation. Lower earnings means less state income tax is paid. Businesses pay less in state taxes because they are making less money. Sales tax revenue dips because people are not buying as much.

While it’s easy to rail against the governor and Legislature for “out of control” spending, the truth is that it is very difficult to dial down state spending enough to match the precipitous dip in state revenue when the economy slows to a crawl or begins to move backward.

The Center on Budget and Policy Priorities reports that midyear shortfalls “totaling $31.2 billion have opened up in the 2009 budgets of at least 37 states.” Projected 2010 state budget gaps “will likely grow to about $100 billion, based on the rate at which states’ revenue bases are deteriorating and the history of prior recessions.”

Republicans argue correctly that tax hikes in a recession are bad for the already ailing economy. In California, GOP legislators have held tight to that assertion, resulting in what Gov. Schwarzenegger has called a dangerous game of chicken.

L.A. Times columnist George Skelton notes that while higher taxes are bad for the economy, so are severe state government spending cuts. Laid-off state workers can’t spend, nor can the poor, elderly and disabled whose benefits are cut. Construction projects are halted, meaning even less money is circulating. Mr. Skelton reports that California Finance Director Mike Genest told legislators that spending cuts are “just about as bad” as higher taxes.

Mr. Skelton writes: “A little civics refresher is needed here: The main responsibility of a state legislator is not to repair or even fret about the economy. That’s a federal task. Washington is allowed to print funny money and run deficits. The state must make ends meet. The principal duty of a state lawmaker … is to pass an honestly balanced budget and make sure spending and revenue match. Or else state government eventually implodes — stops paying vendors, halts construction projects, can’t even borrow.”

When the Maine Legislature goes back into session in a few weeks, it ought to heed that civics lesson and try to avoid that game of chicken being played on the other coast.

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