The Daily News of Los Angeles
January 10, 2003 Friday, Valley Edition


BYLINE: Robert Krol And Shirley Svorny, Local View

THE California budget is not unlike a person undergoing heart surgery. Emergency surgery is scheduled, and we'll hear from the governor today. But if we don't start eating right and exercising, we'll find ourselves in this mess again.

California has a constitutional limit that allows government spending to rise with population growth and personal income. However, personal income fluctuates considerably with swings in the economy. In expansions, personal income increases, allowing the government to spend a lot, only to be faced with the need for dramatic cuts as personal income declines in a recession. That is where California legislators find themselves today. This can be avoided by limiting spending growth to conform to growth in the cost of living (as measured by the consumer price index, for example), rather than income. The advantage of using a cost-of-living measure to limit state spending growth is that it is not as cyclical as personal income. This means that, during expansions, we wouldn't be spending so much that we are caught short in the subsequent recession.

When we are caught short in a recession, politicians inevitably cut social programs, such as funding for hospitals and emergency care for the poor. Politicians are drawn to this path because poor people don't vote as often and, also, the threat of cutting essential services for the poor makes tax increases an easier sell to the voters in general.

In 1979, Californians passed an expenditure limitation law, Proposition 4, that effectively limited state spending increases during economic expansions to the sum of population growth and cost of living increases. But in 1990, Proposition 111 expanded the set of expenditures exempted from the limitation and replaced the cost-of-living adjustment in the spending constraint with one based on growth in per-capita income.

Under the old law, state government expenditures would have been 25 percent lower going into the 2001 recession. We would not be facing a $35 billion deficit over the next 18 months. Politicians would not be threatening to cut essential services. The adjustments needed to solve a much smaller deficit would be easier to stomach.

In 1992, despite catastrophic predictions by politicians and public employee union members, Colorado voters approved a constitutional amendment, the "Taxpayers Bill of Rights," which tied state spending growth to population growth and cost of living increases. It called for automatic rebates when revenues exceed the growth limit and required voter approval of all further tax increases.

Because Colorado politicians have had to control spending, the state is on a far more solid financial footing than California is today. Between fiscal years 1997 and 2001, the taxpayers of Colorado received more than $3 billion dollars' worth of tax refunds.

The spending limit appears to have had a positive effect on the performance of the Colorado economy. It has been consistently ranked as one of the top performing state economies during the 1990s.

An advantage of tax limitations is that they constrain the size of government. Study after study has suggested that, although some spending on infrastructure and basic public services enhances state growth, excessive state spending and the accompanying higher tax rates hamper job formation and economic activity.

Because governments have the power to tax, politicians don't feel the pressure that households and businesses face to prioritize spending. The logic of a state expenditure limit is to force politicians to set clear legislative priorities and to work to increase the efficiency of government services.

California should go back to the tax expenditure limits imposed by Proposition 4, with an automatic tax rebate provision as in Colorado. If we had such a policy, we wouldn't be talking about closing emergency hospital facilities, nor other severe cuts to existing programs.

California has been moving in the wrong direction for a long time with respect to promoting economic growth. An expenditure limit that slows the growth in government spending and shifts greater funds to the private sector could improve both the state government's financial health and the overall performance of the California economy.

EDITOR-NOTE: Robert Krol and Shirley Svorny are professors of economics at California State University, Northridge. Krol is the author of a Cato Journal study on state expenditure limitations.