California Tax Revolt: What Next?
[Posted by Karl]
The Los Angeles Times claims that the campaign over six state budget propositions on today’s ballot in California ended with a whimper, and seeks to downplay the expected result by predicting a low turnout. But yesterday was more like the calm before the storm.
Tonight’s results will gauge what polls suggest is voter fury over the failure of the Republican governor and the Democratic-controlled Legislature to balance the state’s books.
As Californians struggle with joblessness, home foreclosures and sharp losses in the stock market, the state has raised taxes, cut spending and borrowed to fix a $42-billion shortfall — and still remains more than $15 billion shy of a balanced budget.
If voters reject Propositions 1C, 1D and 1E — the three chief money-raisers on Tuesday’s special election ballot — the shortfall will grow to $21 billion.
Gov. Arnold Schwarzenegger and his Democratic allies trotted out the usual human shields in this fight — kindergarteners, firefighters and policemen, nurses, etc. They outspent their opponents by seven-to-one. None of it worked. Although the opposing sides here did not always follow partisan lines (e.g., the SEIU opposes the initiatives), a recent Field Poll showed 72% of voters agreeing that rejecting the measures “would send a message to the governor and the state legislature that voters are tired of more government spending and higher taxes.”
In the face of expected defeat, Schwarzenegger has fled cross-country to Washington, DC, to listen to Pres. Obama talk about new federal tailpipe emissions. There is even more of a metaphor in the trip than the obvious punchline, as California’s future is likely to be found in DC. California Treasurer Bill Lockyer has already asked Treasury Secretary Timmy Geithner to backstop a wave of short-term borrowing California will need to undertake this summer. Indeed, the Busness Insider notes that the yield on California debt has already been shrinking:
We’d say that the market is probably also pricing in the possibility that Barney Frank will get his way and we’ll have a federal backstop of all muni debt soon enough. Even without a formal backstop, we think it’s unlikely that the Obama administration and a Democrat controlled Capitol Hill would let California default.
This is another way that we’ve broken the signalling function of the credit markets, which no longer provide clear indications of expected economic performance thanks to the numerous and varied government interventions.
This is more of the uncertainty that undermines economic recovery. But an administration running auto companies for the benefit of the UAW and its political viability in the Rust Belt undoubtedly considers the Golden State “too big to fail.” After all, the New York Daily News headline would write itself: “Obama to California: Drop Dead.”
However, bailouts are unpopular. Many Americans will chafe just as much at the prospect of paying to bail out California’s decades of inept govenment as they do at paying to bail out GM’s decades of inept management. Obama would bail out California to hold onto those electoral votes, but he will have to worry about how many he loses in the process.