California has gone where few states go — voters approved temporary hikes to both state income and sales taxes and a legislatively approved climate change measure has gone into effect that will auction off carbon allowances.
Increasing taxes and burdening businesses that spew greenhouse gases are supposed to tank the economy, but California budget analysts say the state could go from a decade of deep deficits to a budget surplus as large as $9 billion by 2018.
Californians also handed over the reins of state government to Democrats, giving Governor Jerry Brown a state assembly with two-thirds majorities in both houses. The last time one party held such a commanding position in the assembly was 1933, according to Bloomberg News.
Of course, the road from deep deficits to budget surpluses rests on more robust economic recovery and continued legislative spending control. A key piece of spending discipline is a legislative decision in 2009 to eliminate automatic cost-of-living increases and inflation adjustments for state programs.
Brown said voter approval of the tax hikes "validates the hard work the state has done to cut its deficit and balance its budget. California is now on the path for a fair and sustainable budget as long as we continue to exercise fiscal discipline and pay down debt."
Still, passing tax increases estimated to generate an additional $6-$8 billion per year until they expire in 2018 is a huge political achievement. The sales tax rate went from 7.25 percent to 7.5 percent and income tax rates rose for taxpayers earning more than $250,000 per year. For filers with $1 million in taxable income, the new state income tax rate is 13.3 percent, reportedly the highest in the nation.
Standard & Poor's rating agency called the tax hikes a positive development. The New York Times said California voters displayed "shocking good sense."
Brown and other California officials are quick to say the state isn't out of the woods yet. It still faces a projected budget shortfall, though much smaller and probably more manageable than before. One interesting and unique revenue blip is smaller tax collections — about $626 million less — because of the poor showing of Facebook's initial public offering.
Democratic Senate President Pro Tem Darrell Steinberg issued a statement after the election saying, "This opens opportunities to plan for the future with three important goals — pay down debt, set aside resources for unforeseen economic downturns and reinvest in public and higher education, health and human services and public safety."
California now has the nation's largest cap-and-trade program, as the state Air Resources Board auctioned off its first carbon allowance. The greenhouse-fighting program faces continuing legal challenges, which limits state officials' ability to spend the $400 million raised in the auction.
It remains to be seen whether California's embrace of temporary taxes and a serious climate change strategy will point the way for a national trend or just provide more evidence it is on the left coast.