Is Arnold Going Wobbly?
April 12, 2004; Page A18
WSJ Editorial

Aides to Arnold Schwarzenegger insist that his opposition to raising taxes in California remains as firm as ever. But in recent comments to the press, the Governor sounds an awful lot like a politician hedging his bets.

"At this point I hope we don't have to go there," he told the Sacramento Bee, adding, "That doesn't mean that later on someday you cannot go there." In a separate interview with the Los Angeles Times, he said that closing the state's budget gap without tax hikes might be "wishful thinking." And when asked whether his administration is conducting polls to feel out voters on tax hikes, the Governor becomes evasive.

The left coast press corps isn't known for its kindness to Republican pols, so maybe part of this can be dismissed as fishing for news where there is none. That said, those statements don't sound like the same person who repeatedly insisted on the campaign trail last year that nothing short of an earthquake or a terrorist attack would get him to raise taxes.

We miss the old Arnold, the one who railed against Sacramento's tax-and-spend culture en route to a convincing recall victory in October. As he stares down the task at hand -- a $14 billion deficit and mid-year budget negotiations with the liberal Legislature that created it -- the Governor might want to keep in mind why he was elected in the first place.

California's economic recovery on whole has lagged behind the rest of the country's. Personal income growth in the third quarter of last year -- the most recent data available -- was 31st in the nation, according to the Bureau of Economic Analysis. And the Golden State's 6.2% unemployment rate continues to exceed the 5.7% national average.

But there are also signs of a turnaround. California's manufacturing sector remains the largest in the U.S. The state is a big exporter to the rest of the country, and sales, particularly in the technology sector, are rising as evidenced by higher stock valuations. California is also seeing a return of the IPO market, which has been all but dormant for the past three years. And an increasing number of private equity funds are being developed for investment in start-ups.

Tax hikes are a good way to retard these trends. Businesses, especially in a period when start-ups are being considered, can always choose to locate in tax-friendlier states. A permanent tax increase to finance a permanently higher level of government spending would only make it more difficult for California to create new businesses and keep old ones from fleeing.

Arnold's approval ratings are currently in the stratosphere, and the temptation is to use some of this ample political capital to give in to Democrats and close the budget gap with higher levies. But if California voters wanted the problem solved that way, they would have left former Governor Gray Davis in office. It's pretty clear that Mr. Schwarzenegger was hired to cut spending, not raise taxes.

Just last month voters reiterated their aversion to more tax-and-spend solutions by approving a balanced-budget requirement and soundly rejecting a ballot measure that would have made it easier for lawmakers to raise taxes. If the Governor can take the necessary steps to get state finances under control without raising taxes, he'll be rewarded with even more political capital, which in turn could be used to take on other pressing problems in California, such as the anti-jobs workers compensation system and a steeply progressive tax code that results in wild revenue swings.

To equivocate on taxes now would irk voters who want politicians to keep their word. And it would reward state lawmakers who are trying to make permanent the exorbitant spending levels put in place in the 1990s with windfalls from stock options and capital gains. The message from voters seems to be that they've had their fill of Sacramento-styled "progressivism." There was a time when Arnold shared their sentiments. We hope he still does.


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