Yes car finance

Byline: Terry M. Neal

Almost all the governors in America are feeling the heat as their states suffer from record budget shortfalls and faltering economies. If there's one subject that unites governors from both parties, it's that the federal government should help bail their states out of their respective financial troubles.

California Gov.-elect Arnold Schwarzenegger is only the most recent to make this case. His argument is that because California sends more money to Washington than it gets back, the federal government should help bail California out of its budget mess.

If there's one thing that endures in politics, it's the idea, perpetuated by politicians from both political parties, that we can have everything. California is just the latest example.

What do I mean?

The voters of California recalled a governor who had, among other things, tripled the state's car tax to help pay for a huge budget shortfall, rather than make draconian cuts in state services. Schwarzenegger got big points with voters for his promise to roll back the car tax increase.

Can voters have the services they want without having to pay for them? Well, technically yes, since California allows the government to borrow money to help close budget gaps. Here's some background from The Post's Dale Rusakoff: For Schwarzenegger, Time to Make the Numbers Add Up (October 9).

Enter President Bush

On his way to Asia, President Bush traveled to California Thursday to meet with Schwarzenegger for the first time. Schwarzenegger, who has vowed to try to recover "more than $50 billion" from the federal government to help the state with its budget problems, did not broach that issue specifically in their half-hour meeting, saying that now was "not the right time to do that."

But all indications are that he will stick to his campaign promise to seek federal government assistance. He has to do something, given the $8 billion deficit he'll inherit from Davis.

"By the time I'm through with this whole thing, I will not be known as the Terminator; I will be known as the Collectinator," Schwarzenegger said on the stump.

The Political Solution

Rather than cutting billions of dollars in government spending to balance the revenue that will no longer be coming in from the car tax hike, Schwarzenegger has indicated that he will seek billions from a federal government that's facing a half-trillion deficit in the next fiscal year. (At least a part of that federal deficit is attributable to the fact that politicians in Washington, led by President Bush, cut taxes at a record rate while doing virtually nothing to find offsets in spending.)

As noted by the Associated Press in a news story on Wednesday: "As a candidate, Schwarzenegger said he would seek help from the federal government to stem illegal immigration; get Washington to buy back California's offshore oil leases; and tap federal money to finance his plan for a network of hydrogen car fuel stations."

Schwarzenegger in essence, is saying Californians don't deserve a car tax increase -- instead, it should be up to the taxpayers of Idaho and Mississippi and Kansas and Maine to help California out of its budget crisis.

This is smart politics. Imagine how many votes he would have lost if he had said: "I'm going to cut the car tax. But I'm also going to slash spending on education, sharply increase tuition at the state's universities, lay off approximately 15,000 federal government employees, and halt the rate of growth in entitlement spending."

Politically speaking, it's better to ask the people of Kansas to help close the budget shortfall, since the voters of the Sunflower state don't get to vote for governor in California in November 2006.

And begging and cajoling the feds for money is certainly easier than finding billions of dollars in budget cuts in California, which would spark a war with Democrats eager to brand the new Republican governor as Scrooge.

But They Owe Us!

Schwarzenegger and his supporters argue that California sends more money to Washington in federal taxes than it gets back in federal spending. And they are correct. At least two comprehensive studies confirm that inequity.

In its most recent report on the subject, the Federal Funds Information for States, a nonpartisan group that provides research information to the National Governors Association and the National Conference of State Legislatures, notes that in 2001, California got back 82 cents for every $1 it sent to Washington. The nonpartisan Tax Foundation found that in 2002, California got back 76 cents for every dollar it sent to Washington. According to the Tax Foundation, only five states had a worse ratio than California.

In comparison, the five states with the most favorable ratios were New Mexico, North Dakota, Alaska, Mississippi and West Virginia, which all received more than $1.82 in federal spending for every dollar they sent to Washington.

On its face, this seems overtly unfair and justifies the argument that the federal government owes California. Or does it?

There are a range of complicated reasons for the disparities, as the Foundation explains on its Web site:

"Federal spending on defense and other procurement dollars are often funneled to the states of powerful congressmen, and state governments can grab more federal grant money by skillfully -- some would say slavishly -- manipulating their spending to comply with federal regulations... However, demography is at least as influential as politics. States with more residents on Social Security, Medicare and other large federal entitlements are bound to rank fairly high. Similarly, the high spending levels in Virginia, Maryland and the District of Columbia are explained by the predominance of federal employees."

One of the factors for the imbalance that affects California, for instance, is that it has a relatively young population and thus receives less money in Social Security and Medicare entitlements, according to the Tax Foundation's report.

But the fact that your shuffleboard set is a relatively small part of your overall population -- compared to say Florida's or Arizona's -- hardly seems reason enough to ask those states to help you out of your budget morass.

In Conclusion

This is not an argument for, or against, tax cuts. And it's not an argument for, or against, spending cuts. This is an argument against the perception that it's possible to have it all and without sacrifice. Government operates much the same way your home does. If you spend more money than you take in, you run into debt. When you run up too much debt, paying off that debt becomes onerous and limits your ability to purchase other things you need or want.

Most economists agree that it's all right, and sometimes even good, to run short-term deficits in tough economic times. Long-term deficits are more problematic. What Schwarzenegger could be facing are long-terms structural deficits that can only be addressed by very painful decisions on the taxing and spending sides.

Thursday's meeting between Schwarzenegger and Bush may be start of a beautiful friendship, forged by mutual interests. But it appears unlikely that the federal government can help California out of its troubles.