Embarrassment of Riches

Money keeps raining on Sacramento, prompting Democrats in the Legislature to add to their spending wish lists and Republicans to call for new tax cuts. Democratic Gov. Gray Davis has taken the prudent course by refusing to commit the state to new programs or tax reductions that government could not afford if the hot California economy took a downturn.

Keeping the squeeze on will be politically difficult since the bounty is approaching embarrassing proportions. When Davis unveiled his annual budget earlier this month, he estimated that the state would collect $6 billion more in tax revenues than was forecast for this fiscal year (ending July 1) and the next.

Now Elizabeth G. Hill, the Legislature’s independent fiscal analyst, predicts that the surplus for the two-year period might top $9 billion. Hill’s estimate takes into account a surge in tax receipts in December, led by levies on capital gains--figures not available when the governor’s budget was drafted. Hill’s report assumes there will be no serious cooling of the economy in the coming 18 months or a precipitous drop in the stock market. But Sacramento cannot ignore the possibility of a downturn and must be prepared to cope with one.

That’s why Davis is urging the state to hedge against a recession by spending much of the surplus on one-time items. Davis’ budget includes about $3 billion in such appropriations, including $562 million for rebates on smog-impact fees that have been ruled illegal, $358 million for the budget reserve and $500 million for settlement of outstanding lawsuits against the state. Hill now says the new surplus figures give Davis an opportunity to put about $1.5 billion into new or expanded programs or tax relief.

Davis told the state School Boards Assn. last week that he expects to give additional money to schools in May when he revises his budget on the basis of April tax receipts. He did not say how much but suggested that the money could be used at the discretion of local school boards. This is good news since most new state aid to schools in the past several years has been earmarked for specific programs by Sacramento.

Legislative leaders want more money for education, the mentally ill, transportation, health and welfare. Senate Republicans want a cut in state college and university fees, which were raised sharply during the recession years of the 1990s. Local government budgets remain in a hole because of the expropriation of property tax funds by the state during the recession. All these proposals deserve consideration.

Republicans want even more tax reductions. But the state has already reduced taxes by more than $3 billion during the past three years. Infrastructure and other key needs have lagged for decades and now rate a higher priority. The strong economy offers California the opportunity to build for its future.