IMPEACH BUSH

Five years ago this month, Arnold Schwarzenegger met with the press for the first time as a candidate for governor. Emerging from a conference with a group of economic advisers at a hotel near the Los Angeles airport, Schwarzenegger declared his opposition to raising taxes to help balance the state budget.

The people of California, he said, were already taxed too much.

"From the time they get up in the morning and flush the toilet, they're taxed," Schwarzenegger said. "When they go and get a coffee, they're taxed.

"They get into their car, they're taxed. They go to the gas station, they're taxed. They go for lunch, they're taxed. This goes on all day long. Tax, tax, tax, tax, tax. Even when they go to bed, you can go to bed in fear that you are going to be taxed while you're sleeping, that there is a sleeping tax."

That was then. This week, Schwarzenegger is proposing to raise taxes on coffee, cars, gas, lunches and, yes, even toilets and mattresses. In a closed-door meeting with legislators, the governor reportedly suggested a temporary, 1-cent sales tax increase to try to break the latest partisan logjam over the budget.

The proposal amounts to an admission of failure. Running in 2003 as a novice politician after careers as a bodybuilder and actor, Schwarzenegger thought he could cut taxes, control spending and balance the budget, ending what he called "those crazy deficits." But the fiscal and economic problem was more complicated than he knew, and the politics far more vexing.

Schwarzenegger did cut taxes. He campaigned on a pledge to roll back the vehicle license fee, or "car tax," which his predecessor, Gray Davis, had tripled. And on Schwarzenegger's first day in office, the new governor issued an executive order reducing the tax by two-thirds.

But controlling spending proved far more difficult, as, ironically, that first tax-cut order foretold. The car tax against which Schwarzenegger had railed, while controlled by the state, was actually a source of revenue for local governments. And so when Schwarzenegger reduced it, he also made good on a pledge to pay cities and counties what was then $4billion a year to make up for what they lost when he cut the car tax.

The state, however, did not have that money to spare, and the payments to cities and counties added to the deficit Schwarzenegger had vowed to eliminate. That obligation to local government has since grown to $6 billion – not coincidentally the same amount that would be raised by the sales tax increase Schwarzenegger now supports.

The governor wants the tax to be temporary, and to revert automatically in three years to a rate below its current level. He also wants to link the tax increase to the creation of a "rainy day" reserve designed to smooth out the volatility in the state's tax system. Tax windfalls that come into the state's coffers in good years would be set aside in the reserve, then withdrawn in bad years when a slowing economy leads to flat or shrinking revenues.

Schwarzenegger's journey from tax cutter to tax raiser became all but inevitable in the early weeks of his administration, when he backed down from a confrontation with the Democrats who, then as now, controlled the Legislature. He had just been elected with a huge mandate to fix the problem, on a platform of cutting taxes and spending. He proposed a strict constitutional spending limit, which he knew, or should have known, the Democrats would reject. That they did.

But instead of taking that issue to the voters, or negotiating a compromise, he let the Democrats write a phony "balanced budget" amendment that they then coupled with his proposal for a $15 billion bond measure to restructure (and expand) the state's budget debt. Schwarzenegger and the Democratic leaders launched a bipartisan traveling road show to persuade voters that the two measures together would solve California's budget woes for good. The voters cooperated, passing both proposals, but the problems continued.

The economy briefly recovered from its early-decade doldrums, bringing new tax revenue to the state. But lacking a legal limit or the political will to control spending without one, Schwarzenegger and the Legislature spent everything that came in, and then some.

The year Schwarzenegger took office, the state's general fund tax revenues were about $77 billion. Four years later, they were $101 billion.

That's an increase of $24 billion, or about 31 percent. As a share of the state's economy, tax revenue is near an all-time high.

Candidate Schwarzenegger surely would have scoffed if anyone had suggested in 2003 that the state could not meet the needs of its people with that much money. But there are always more needs – or wants – than there is money to pay for them. And once the government commits to providing a certain level of service, it is very, very difficult to pare that back when a slowing economy reduces revenue.

That's the reality Schwarzenegger faces now. For a guy who once thought that all of this would be a snap, it must be humbling.

Call The Bee's Daniel Weintraub, (916) 321-1914.