Highlights from the State of the State

Governor Schwarzenegger outlined several, key proposals to reform an out of control budget, stimulate job growth, prop up the housing market, and provide better care for veterans.  Here were the highlights:

Jobs- He proposed a $500 million package that would create jobs and retrain workers.  In addition, he proposed a sales tax exemption for green-tech manufacturing equipment purchases.  While proponents of state spending will likely support the $500 million jobs package, a few, critical questions must be considered.  For example, won’t $500 million add to the already gargantuan budget deficit?  What type of jobs will be created?  Will they enhance California’s productive capacity? Will they be temporary or permanent?  How much will it cost taxpayers to create each job? Will the package allow small business owners to hire additional workers and remain profitable?  As for the sales tax moratorium, environmental proponents will hail the measure, but why will the tax exemption only apply to this particular industry?  What about all the other businesses and industries that could greatly benefit from a sales tax exemption to boost their bottom line and hire additional employees?  Also, to compensate for the lost tax revenue, will the state cut spending in other areas of the budget to maintain a balance?

Housing- He proposed a home buyers tax credit of up to $10,000 in a renewed effort to stimulate a decimated housing market.  While Americans have proven that they will purchase homes and cars with generous government handouts, $10,000 tax credits also pose a number of problems.  First, it aggravates an already out of control budget deficit.  Second, it prevents further drops in home prices, which many economists hail, but such a measure punishes those individuals and families who have saved their money wisely, but still cannot afford to purchase a home without government assistance.  In addition, the $10,000 credit encourages those who may not truly be able to afford a house to make the purchase anyway, at taxpayer expense, an error that underlies the root cause of the housing bubble burst in the first place.  Third, the government tax credit allocates resources to a failed industry that could perhaps be better utilized in other areas to boost production and investment.

Tax reform-  He proposed easing the tax burden on California’s most affluent residents and spreading this burden on a much broader base of the population.  He also advocated for one-time tax hikes being utilized strictly for one-time state expenditures.  The latter measure is consistent with basic economics, but in practice, one-time tax hikes almost always convert to multiple, new spending programs in Sacramento.  As for easing the tax burden on California’s rich, opponents will likely severely criticize any such measure as brutally unfair to the lower and middle classes.  However, with nearly 3,000 taxpayers leaving the state on a weekly basis, it might prove prudent for the state government to reconsider its tax code before it loses many more of the affluent individuals and business owners who pay a significant portion of the state’s taxes.  As long as the exodus continues, the lower and middle classes will be forced to pick up the tab, and the deficit will continue to grow.

Budget cuts- While cuts are wildly unpopular in the golden state, $83 billion of projected deficits over the next four years demand a number of painful cuts in excess borrowing and spending.  The Governor is proposing more significant cuts in state prisons and future employee pension plans, while shielding education from any cuts.  The prison lobby and labor unions will likely balk at such proposals, but teachers’ unions will be pleased.  However, one wonders if completely insulating one sector from budget cuts, while making token cuts in only a couple other areas of the budget, will bring the state anywhere close to a balanced budget.  Perhaps Governor Schwarzenegger, the future Governor, and the state legislature should heed the example of former New Mexico Governor, Gary Johnson, as well as the sage advice of former San Francisco mayor, Willie Brown.

Federal aid- The Governor argued that California deserves a “bigger piece of the federal pie”.  On the tax front, he makes a compelling case, considering that California receives far less in federal reimbursement than other states, even though California subsidizes the rest of the nation to a significant degree.  In addition, on the healthcare front, Schwarzenegger rightly argues that the current reform bill will shift a significant portion of the Medicaid cost to the states, a $3-$4 billion additional cost that California is unable to afford.  If the Federal Government refuses to address the core issues of unfair taxation and increased health care costs for the states, and if the Federal Government decides to reward California with billions in aid, one must also consider the consequences.  The federal budget deficit, running at $1.4 trillion, will grow, as will the national debt, which is over $12 trillion.  Such monolithic deficit spending cannot be sustained for much longer without serious consequences to taxpayers and the economy at large.

Veterans- Schwarzenegger proposed a new program called, “Operation Welcome Home”, in which California would hire 300 veterans to establish nine regional teams.  These teams would connect with returning veterans and ensure they receive the proper benefits and job training required to succeed in civilian life.  While such a proposal is truly admirable, it raises a number of serious questions.  First, for a nation that is sending its men and women into harm’s way year after year into third world war theaters, why is it not providing the necessary benefits and job training for its veterans?  Why is it that our military, suffering from high rates of Post Traumatic Stress Disorder (PTSD) and record suicide rates, has to rely on the goodwill of bankrupt states to help it assimilate successfully back into civilian life?  Isn’t that the express duty of the Federal Government? 

The Governor’s State of the State address is often more rhetorical than substantive, but with the state mired in the worst economic downturn since the Great Depression, the stakes couldn’t be any higher.  Independent voters are encouraged to objectively assess the Governor’s proposals, to rigorously vet them, and to consider the potential consequences, both positive and negative.