Fiscal conservatives won a quiet victory last week when California enacted a budget that did not include a major tax increase. Plagued by an immense $38 billion shortfall, the summer months produced much in the way of acrimony and little hope for a resolution. As a result, many were surprised when the assembly passed a $100 million budget, which Governor Davis promptly signed into law on Saturday.
Now, this budget is far from perfect. It triples the vehicle-license fee and hikes other fees. Furthermore, the budget is dependent on one-time borrowing and will likely result in another budgetary shortfall next summer. Still, the fact that the impasse was resolved without a large tax hike exceeded the expectations of all but the most optimistic of observers.
So how was California able to escape from its $38 billion deficit without a substantial tax increase? Several reasons. One, assembly Republicans demonstrated remarkable solidarity in their opposition to tax increases. Senate Minority Leader Jim Brulte even threatened to campaign against any Republican who voted to raise taxes.
Two, California’s supermajority requirement played an important role. In California, Democrats possess majorities in both chambers of the state legislature. As a result, the opposition of Republicans would have meant little if only a majority was necessary for a tax increase. However, California’s supermajority requirement — enacted in conjunction with Proposition 13 — gave assembly Republicans the ability to block tax increases and obtain concessions from Democrats.
Indeed, during the summer, supermajority limits proved to be effective. Of the seven states with comprehensive supermajority limits that enacted budgets by July, six did so without raising taxes. According to data from the American Legislative Exchange Council, the spending-cut-to-tax-increase ratio in these seven states was an astounding 137 to 1. Conversely, in the rest of the country tax hikes exceeded spending cuts.
However, the actions of the Nevada supreme court in late July showed that California’s supermajority was providing Golden State taxpayers with a false sense of security. In response to a lawsuit filed by Nevada Governor Kenny Guinn, the Nevada supreme court effectively nullified Nevada’s two-thirds supermajority requirement for tax increases.
This was ominous for two reasons. First, shortly after the ruling, a spokesperson for Gov. Davis refused to rule out a similar lawsuit, saying that it was “something that we could possibly look at in the future.” Secondly, California courts have frequently issued rulings hostile to the local government limitations included in Proposition 13. Considering the magnitude of California’s current fiscal shortfall, it seemed unlikely that state courts would support the supermajority.
However, in the end it was the recall effort that saved California taxpayers. With Davis’s popularity hovering at Nixonian levels, Davis and assembly Democrats realized that any substantial tax increase would damage his chances of surviving the recall. Consequently, Davis and the Democrats were more willing to agree to a budgetary compromise that did not involve a substantial tax hike.
As a result, regardless of the outcome of the recall election, the recall has already scored two important victories. First, it succeeded in preventing an economically damaging tax increase. Secondly, and perhaps even more importantly, it likely prevented a lawsuit that might have effectively crippled both tax limitations and the entire initiative process in California.
Indeed, it was just 25 years ago when another form of direct democracy was used to save California from a different kind of fiscal crisis. With property-tax bills soaring and budgetary surpluses mounting, Proposition 13 provided some much-needed tax relief to beleaguered California taxpayers. However, Proposition 13′s impact went far beyond reducing property taxes. Indeed, it inspired activists from across the country to use direct democracy to place a variety of limits on state government.
Today’s recall effort might have a similar long-term effect. In the future, recalls could be used to remove profligate legislators and governors from office. They could also be used to remove judges who nullify constitutional tax limitations. However, even if Gov. Davis remains in office and the recall remains a rarity, the recall effort of 2003 has still been a rousing success for the taxpayers of California.
— Michael New is an adjunct scholar with the Cato Institute, and a post-doctoral fellow with the Harvard-MIT Data Center.