California is suffering from a collapse in tax revenues partially brought on by the recession but also disastrous tax cutting and gridlock-inducing budget procedures. Schwartzenegger's proposed spending cuts could create as many problems as they solve. Time to stop living of the state credit cards and pay up.
OPINION
EDITORIAL
The Sorry State of the States
Published: May 24, 2009
Is California next in line for a bailout? Facing a $21 billion budget gap, California has asked for federal aid, probably in the range of $5 billion to $10 billion. Whatever form it might take, say loans or loan guarantees, taxpayers nationwide would be kicking in to help clean up California's mess.
What the Obama administration should make clear is that a bias for spending cuts - and against tax increases - is the wrong approach for California and other states.
Both spending cuts and tax increases are harmful in a downturn, because they reduce already weak consumer demand. But most states are required by law to balance their budgets, so when deficits emerge, they are forced to do one or the other, or both.
Contrary to conventional wisdom, raising taxes may be better than spending cuts because tax increases, especially if they are focused on wealthy taxpayers, have less of a negative impact on consumption.
Spending cuts hit consumption hard, depriving the economy of money that would otherwise be spent quickly. They also have the disadvantage - so evident in the cuts proposed by Mr. Schwarzenegger - of falling heavily on the needy.
The Sorry State of the States
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