A Tale of Three States and Governors

California, New York, and New Jersey. All three are facing a monumental fiscal crisis as a result of the economic slowdown and turmoil on Wall Street. California also has been ground zero of the real estate slump, as entire California communities are underwater - the homeowners owe more on their mortgages than the property is actually worth (88% of homeowners in ZIP code 95391, Mountain House, owe more than the property is worth).

With that as the dire backdrop, it is illuminating as to see how the governors of these three states are rising to meet the challenge.

New York Governor David Paterson, a Democrats, is actually demanding that the state cut spending by perhaps $2 billion as the state could face a deficit of $47 billion within four years. He knows that the moment that the idea of increasing taxes is raised to address the deficit, he's lost all bargaining power and the unions and the legislature will have him (and the taxpayers) for lunch.

His best move is to demand serious cuts in the state budget at a time when the state can ill afford to pay gold plated union contracts and foist unfunded mandates on local communities, which simply pass on those costs in the form of higher property taxes. Paterson seems to understand that you cannot tax your way out of the mess. You have to grow out of it, which means addressing fiscal responsibility to get the state on sound financial footing.

New York is especially hard hit because of its dependence on Wall Street and the large number of financial companies taking a huge hit with the toxic paper meltdown. All that has a ripple effect across the city and state.

Meanwhile, across the country, Governor Arnold Schwarzenegger, a Republican, is facing a ballooning deficit that could soar to $28 billion. It's already a $11 billion hole less than five months into the fiscal year. The California legislature's solution? It's hardly bold. It's to tax businesses even more than they already are. Then again, it's the same solution Schwarzenegger arrived at: hefty tax hikes. It's a solution suggestive of the Obama plan for the nation - to raise taxes even further into the teeth of a recession.

At the state level, that means that taxpayers and businesses will flee to states with lower tax burdens, startups will look outside Silicon Valley for their capital since the startup costs will not be nearly as high outside the state, and California will lose its preeminence as an incubator for new technology companies.

A former California state treasurer, Phil Angelides, is suggesting an independent financial board take over the state's financial situation because the governor and legislature have brought the state to the brink of ruin.

For good measure, Governor Jon Corzine (D-NJ) warns that the property tax rebates due homeowners might not be forthcoming as a result of the dire financial shape of New Jersey.

New Jersey Gov. Jon S. Corzine said property tax rebates for homeowners and renters could become a casualty of the faltering economy.

Asked whether he'd consider cutting rebates to help balance next year's budget, Corzine said he could offer no guarantees amid a dismal economic forecast and projected state budget deficit of between $2.5 billion and $4 billion.

``We're hopeful that we will be able to sustain it, but I can't promise anything in this environment,'' Corzine said Tuesday after attending the dedication of the state's World War II Memorial across the street from the Statehouse.

So much for the idea that the increase in the sales tax funding property tax relief. I told you it wouldn't happen. I warned about the dire financial shape way back in 2006 when things were still pretty good nationally, but the New Jersey state budget was a disaster.

The idea of raising the state's sales tax to fund property tax relief was an absolute sham, and that the governor is claiming that the rebates may not be forthcoming only highlights the fact that the state's financial stewards are inept and woefully incompetent to deal with the situation. The only solution New Jersey's politicians seem to grasp is tax hikes; which can help explain why businesses continue to flee the state. Making the necessary cuts to the state workforce and trimming obsolete and useless programs that are home to waste and graft don't even enter the conversation.

The problem could have been minimized had these states, and others facing similar financial troubles done the politically difficult but financially prudent and responsible task of reducing spending even when times were flush so that the states would be better equipped to handle a downturn in the economy, let alone a full blown crisis nationwide. Instead, these states increased spending and engaged in deficit spending even in flush times. Now, everyone is reaping what was sown.

The solution seen more often than not is to tax their way out of the problem. I hope that Gov. Paterson sees those spending cuts through, as it is the only way to get the state on an improved financial track. California and New Jersey will continue circling the financial drain with talk of more taxes and elimination of rebates.

At some point, taxpayers will have enough of the tax and spend game and these politicians will learn what real change is about.

UPDATE:
So much for Paterson being on the ball; he's pushing for a gas tax hike, which would be on top of one of the highest in the nation gas taxes incurred by drivers in the state. (HT: Jammie) A beneficiary of that tax hike should it happen? New Jersey, which has one of the lowest gas taxes in the nation, and they could see a spike in drivers coming across the border to fill up, rather than pay the crazy taxes that already make up a significant chunk of the price at the pump.

UPDATE:
Mixed bag for Paterson. He's calling for $5.2 billion in cuts, which is far more than previously indicated. The state budget was roughly $124 billion this fiscal year. That means the cuts represent a 4% reduction in state spending, or still less than what the state spending increased over the prior fiscal year. That's right. The opponents to any cuts in state funding will claim that the sky is falling as a result of these cuts, but the fact is that if these cuts were enacted, we still have more spending than the prior year, when New York was still living outside its means.

It puts Governor Paterson's figures into perspective. He's not quite talking about rolling back the state budget to last year's figures - and his foes will fight this tooth and nail, and will likely settle for a dog and pony show of some cuts. It barely scratches the surface of what needs to be done, but it's still more than New Jersey or California are even willing to consider.