- The Washington Times - Monday, October 13, 2003

During his campaign, Arnold Schwarzenegger repeatedly pledged not to raise taxes. His resolute stance reminded influential columnist-author and radio talk show host Dennis Prager of former President George Bush’s famous line: “No new taxes. Read my lips.” Mr. Prager observed, “We know what happened to the first Bush.”

Mr. Schwarzenegger’s strong position defined his fiscal conservatism. Reluctant Republicans would say, “At least Arnold’s solid on this issue.”His corollary insistence that state government abandon its profligate ways helped make him competitive with Tom McClintock.Even the Howard Jarvis Taxpayers Association endorsed Mr. Schwarzenegger over Mr. McClintock,thelong-time champion of Proposition 13, the 1978 ballot measure that limited homeowner property taxes.

In contrast, Democrat Cruz Bustamante had promised a “tough love” program of tax hikes. Early, DemocratshadattackedMr. Schwarzenegger as former Gov. Pete Wilson’s puppet. Initially, that attack seemed to potentially limit Mr. Schwarzenegger’s crossover vote from Democrats or gains among independents. When Warren Buffett, Mr. Schwarzenegger’s economics adviser, publicly suggested revamping Proposition 13, the candidate could not give on the tax issue.

What complicates matters is that Messrs. Bustamante, McClintock and Schwarzeneggerall pledged to repeal the “tripling of the car tax.”Actually, this tax hike was a return to the status quo ante, the tax rate on vehicles in effect early in the Wilson administration.Mr. Wilson had cut the car tax, but allowed, if state revenues declined, for reinstating the cut.But most voters did not know or care about this history.This tax hike seemed obscene.

The car tax is a lump-sum payment. But it’s deductible from federal taxes, so the blow is softened for taxpayers who itemize. In contrast, a sales tax hike is easier to pitch, because voters don’t notice the nickel-and-dime erosion of their money. And, besides, the sales tax is not deductible.

But if Mr. Schwarzenegger repeals this car tax hike, where does he make up the revenue? He wants President George W. Bush to help, because the state should be compensated by the federal government for costs related to illegal immigrants. The logic: If the federal government cannot protectitsborders,it should reimburse California for public services for illegal immigrants.

Mr. Schwarzenegger would put Mr. Bush, a fellow Republican, in a difficult position. If the president says no, it could hurt him politically. But aren’t his chances for carrying California only marginal? And what if he says yes? Then, several states might ask for similar dispensation, and we have a new trend.Besides, members of Congress would not support this appropriation without pork for their states. Moreover, consider that the auto tax went into effect on Oct. 1. In sum, how can California ask the feds for a bailout, when it is cutting its own revenue sources?

Mr. Schwarzenegger suggested that Indian casinos could pay higher taxes.In the end, he may cut a deal to trade more slots for more casino money to the state.Presumably, raising taxes on Native Americans is not raising taxes on Californians.Remember Mr. Bustamante’s logic? He proposed raising taxes on smokers and the rich, rather than a “general increase in taxes.” I guess what we need are rich, smoking Indians.

Then, there is the matter of fees. But one man’s fee is another man’s tax.Can Mr. Schwarzeneggerraise “fees” and say he’s not raising taxes?Still another option is “temporary” taxes that expire. But the public never believes a tax is temporary (I wonder why). Just the opposite, they discovered, much to their surprise, what was temporary: the car tax reduction.

OnewaythatMr. Schwarzeneggermight avoid a tax hike is to renegotiate contracts with government unions. But why would they give up sweetheart deals? From their standpoint, it’s a bad precedent. One alternative is to defer pay and benefit hikes. Los Angeles teachers did that a few years ago during a local budget crisis.But when the bill came due years later, the school district was that much worse off.And, all this avoids the serious long-term problem of pensions for state employees.These are essentially unfunded liabilities that threaten the state’s financial solvency.

Much of the state budget is locked in.It’s difficult, but hardly impossible, to cutspending.Mr. Schwarzenegger’s audit will take months, and longer still to effect derived economies.Long-term changes would require ballot measures.Unless the state legislature puts them on the March ballot, Gov. Schwarzenegger would have to mount recall-like petition drives to put reform measures on the November/2004 ballot. That’s a long time off.

Finally, Mr. Schwarzenegger could opt for massive borrowing.But will Wall Street buy those bonds?. Besides, interest rates will be sharply higher.Do we really need a feel-good budget that avoids needed reforms and major spending cuts?

In the end, Mr. Schwarzenegger can raise taxes. But, then, he’ll be just another politician.

Arnold Steinberg is a political strategist.

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