This Budget Hurts

The unanticipated revenues, by a fortunate coincidence, total roughly the same amount as contemplated in Schwarzenegger’s temporary tax-increase scenarios. “He is the luckiest man alive,” says one longtime L.A. observer of the Hollywood superstar.

 

As befits someone who has now embarked on his third extraordinary career, luck is only part of it. Schwarzenegger did deals with the teachers’ union, state university leaders, and local government honchos that would lead to reduced state spending for two years and more spending after that. He is buying time for his hopes to come to fruition. If they do not, he has the traditional tools of more cuts and taxes to fall back on.

There have always been scenarios for temporary tax hikes in the Schwarzenegger circle, usually for the few billion dollars matching this year’s revenue windfall. After the most recent time I reported that, Schwarzenegger himself allowed in a series of newspaper interviews that it might just be necessary, that perhaps he had been in “denial.”

The governor had been asked point-blank, at two press conferences, to make a hard-and-fast pledge not to raise taxes. He had artfully declined to do so, despite having veered more into anti-tax rhetoric in the recall campaign.

Schwarzenegger’s sometime mentor Pete Wilson raised taxes right away when he came into office with a huge budget deficit. But circumstance may have forced Schwarzenegger’s hand in the campaign. His friend and “chief economic adviser” Warren Buffett’s famous musings about the need to reverse Proposition 13 nearly cost him one of his few “issue anchors,” as his advisers called them, on the right, the Howard Jarvis Taxpayers Association endorsement, which he had to chase again for weeks because right-wing Senator Tom McClintock wouldn’t get out of the race. And Schwarzenegger leads a Republican Party that has grown used to saying no, for whom avoidance of any tax increase has become an article of almost religious faith.

The truth is Schwarzenegger articulated no real budget plan in his campaign, just a dodge — “Here is my plan,” he intoned in a TV spot, “audit everything, open the books, and then we end the crazy deficit spending.” He vowed that The Audit that would find billions in waste, fraud and abuse. (His polling indicates that most voters think between one-quarter and one-third of the state budget is wasted spending, a fanciful notion that explains why most voters have not wanted either cuts or, with few exceptions, tax increases.) But The Audit as such didn’t take place in the promised 60 days, and was a mechanism to bring highly touted conservative Donna Arduin in from Florida as his state finance chief. Arduin did an overview of the state’s tangled finances before being thrust into budget making.

Schwarzenegger’s approach was much like that of his signature movie characters, who would say “Trust me” with an ironic grin. As Arduin began with her patented social-service cuts, Schwarzenegger ran into an immediate problem on cutting aid to the mentally disabled, a mushrooming state program. And backed down. He instituted a long-range project promised in his campaign called the California Performance Review (CPR), which is the real Audit, looking for ways to perform the same governmental functions more efficiently.

Schwarzenegger took mock umbrage at my recent report that the CPR is behind schedule. “We will blow up the boxes,” he says, referring to his famous line in the State of the State address about remaking state government. “And you may be in one of the boxes, Bill.”

“We will do the CPR early next year,” he declares. “We will get the savings from it and move forward.” The administration had hoped for an accelerated reorganization plan for state government agencies this spring, but in the midst of Schwarzenegger’s busy agenda that fell by the wayside, a victim of internal dissension and opposition from lobbyists and other special interests.

But what if the savings don’t come, what if the economy doesn’t revive to the extent Schwarzenegger intends? Is it better to raise taxes early and get over the hit, as Schwarzenegger could clearly do despite the entreaties from some who’ve convinced themselves the recall was about tax avoidance, or do it before an election?

“It will work out,” says Schwarzenegger. That has always been his experience. Before he was governor.