Flash Report, April 14, 2009

A "must read" by Steve Moore, the lead economics writer for the Wall Street Journal's Opinion Page...

Not So Golden

SAN DIEGO, Calif. -- A key component of the budget deal that California's Republican Governor Arnold Schwarzenegger struck with the Democrats earlier this year was a ballot initiative to limit state spending in the future. This spending limitation was supposed to be a big victory for taxpayers. But lo and behold, taxpayer groups throughout the state are fighting against Proposition 1A. Instead, it's the unions and other liberal interest groups in Sacramento who are spending millions of dollars arguing for its passage when it appears on the ballot next month.

What went wrong? The answer is that Prop 1A has an expensive "catch." As legendary California taxpayer advocate Lewis Uhler, head of the National Tax Limitation Committee, puts it: "We are now confronted with the reality that Prop. 1A comes with a price tag of new or extended taxes triggered by its passage and continuing through fiscal year 2012-13."

Adds a fuming Mr. Uhler: "Democrat leaders of the legislature who wrote the title and summary of Prop. 1A deliberately and intentionally sought to mislead California voters by omitting the fact that voter approval would trigger this huge tax increase."

That view is shared by many of the tax activists I talked to in the state. Jon Fleischman, editor of the indispensable California political newsletter FlashReport, complains: "Unbelievably, voters are tantalized with a supposed common sense fiscal reform, but are told they have to vote to tax themselves more to pass it." Mr. Fleischman calls the plan a "deceitful scheme." Others who have lined up to attack the initiative include radio host Michael Reagan, conservative organizer Grover Norquist, and scholars at the free-market Claremont Institute and Pacific Research Institute. This week Claremont assessed the merits and demerits of Prop 1A and gave it an "F."

Meanwhile, Gov. Schwarzenegger is placing all his remaining political chips behind this and four other initiatives on the ballot next month. When he signed the budget agreement back in February, he said that the deal was the "best we could get" from Democrats. California's income and sales taxes under the plan would become the highest in the nation (at least until New York hikes taxes again), costing the average California family about $1,500 in additional taxes. True, the spending cap would restrain any increase in future outlays to the average of spending growth of preceding years and require any surplus revenue to be placed in a rainy day fund. But the poison pill is that Prop 1A extends higher tax rates on income and sales for an extra two years through 2012.

Mr. Fleischman expresses the attitude of many taxpayer advocates when he says: "You know things are really bad in California when 'the best we can get' on the budget is the largest tax increase in the history of the state."

The betting is that Prop 1A will be defeated by voters and California will be right back in the multi-billion dollar deficit ditch it dug for itself last year.

-- Stephen Moore