Texas Leads as California Dreams On

California is in bad shape. It is likely to get worse. As America's most populous state faces a $26.3bn (€18.4bn, £16.2bn) budget gap, lawmakers in Sacramento have had no choice but to make desperate spending cuts. Their latest solution? The legislature is debating a plan to release 27,000 prisoners early to save money on correctional facilities.

California, like so many other states facing budget shortfalls, is a victim of decades of reckless spending and unsustainable budgets. It was not always like this. The Golden State's government services and public institutions--including its prisons--were models for the country in the 1960s and 1970s. But Californian policymakers stopped planning for the future. The state's population ballooned from 23m in 1980 to 36m in 2008, and demographics shifted dramatically due to immigration. Roads, schools and prisons built with 1975 in mind are now crumbling and overcrowded.

Albany is just as paralysed as Sacramento. New York State legislators, both Republican and Democrat, avoided difficult decisions and kept spending unsustainably high for years. In New York, per capita Medicaid spending is double the national average. New York also has the highest per-pupil spending in the country, but ranked only 22nd in academic achievement in a US Chamber of Commerce state-by-state study of school systems. Even as private sector jobs evaporated, the state awarded 160,000 public sector employees a 3 per cent pay raise this spring. In the face of falling tax revenues because of last year's crash on Wall Street, legislators increased total spending by 9 per cent. The result: a $17bn deficit in 2009.

Leaders should not plan forward from today, but instead plan backwards from the type of society Americans hope to see decades down the road.

What California, New York and the other 42 states facing budget deficits show us is that America needs to rethink its long-term budgeting strategies. To have successful budgeting, we must start with a popular vision of the successful society. Leaders should not plan forward from today, but instead plan backwards from the type of society Americans hope to see decades down the road. This is why raising taxes to fix budget holes is a dead end. Sustained reckless budgeting financed by endless tax increases reflects exactly the kind of society that Americans do not want.

Look no further than California, where in May voters overwhelmingly defeated Proposition 1A, which would have raised taxes to enlarge the state's budget stabilisation fund. Just six months after Barack Obama carried California in a 61-37 per cent landslide, all 53 congressional districts rejected this stop-gap tax hike as a cure for the state's endemic budget woes. Even in districts represented by champions of big government, Proposition 1A went down handily: 53 per cent of Nancy Pelosi's San Francisco constituency said no to more taxes, as did 68.9 per cent of Henry Waxman and Maxine Waters's southern California districts.

This is not confined to California. According to a recent Rasmussen poll, 57 per cent of Americans still think "tax cuts generally help the economy". A CBS poll in February showed 59 per cent of Americans say "tax cuts for business would be more effective in ending the recession" than more government spending.

How do we reconcile America's resistance to further taxation with the dire need to overhaul a broken budgeting process in bankrupt state capitals and in Washington? Texas can serve as a pro-business, anti-waste model that could be replicated across the country. The state's long-term budgeting strategies, business incentives and wise exploitation of its natural resources have left it in sound fiscal shape.

The Texan legislature meets only every other year, for 140 days. This allows legislators to pursue careers outside politics and prevents an entrenched political class from growing up in Austin. During the 2003 legislative session, Texas lawmakers erased a $10bn budget deficit and have balanced the books ever since.

Texas is one of only six states that did not run a budget deficit in 2009, and it has "insurance" thanks to farsighted legislators in the 1980s. Since 1988, Texas has maintained a rainy-day fund, primarily paid for by taxes on oil and gas companies, which is now worth $6.7bn. The fund can only be used if two-thirds of both houses of the state legislature approve.

Texas lawmakers have also made it clear that they like jobs enough to like the people who create jobs. There is no state income or capital gains tax, and state enterprise funds and creative governments have fostered dramatic economic growth: the state now leads the country with 64 Fortune 500 companies and in 2008 created 70 per cent of all net new jobs.

The most destructive option is to accept a debilitating budget deficit as a permanent fact of life. Recall that only 14 years ago, the new Republican Congress balanced the federal budget and kept it balanced for four years. We did it by keeping annual increases in spending at an average of 2.9 per cent--including entitlements--while reforming welfare and Medicare and doubling the budget of the National Institute of Health. This would not have been possible without our shared vision of a healthy society, defined by the Contract with America.

It can be done, and it must be done with an eye on both our short-term needs and our long-term goals. Figuring out where we want to be in 2035 is the first step towards a better budget process in 2010.

Newt Gingrich is a senior fellow at AEI.

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