THE CHAOTIC predicament of municipal and state government financing is rapidly renovating the texture of domestic politics. Reactions such as California's Proposition 13 appear as exceptional warning flares generated by primitive but widespread discontent over government services and their costs. But behind these exceptional outbursts, political and economic realignments are redefining the dynamics of the state's budget growth.

The widening gap between state revenues and the demand for state funds raises two fundamental questions. First, our understanding of the dynamics of budget growth is clearly underdeveloped, attracting much concerned attention. Traditional economics emphasizes the use of government expenditures as countercyclical economic stimuli, but the actual history of government spending suggests that more important and complex political economic pressures are involved.

Second, the social consequences of public sector expansion merit careful scrutiny. Government consistently expands its role in the economy, and the economic strains generated by fiscal restraint within the public sector are already engendering new social tensions.

The new awareness of government financial strains and popular resistance to increased taxes has focused attention on the penetrating analysis of the state's budgetary dilemma contained in James O'Connor's The Fiscal Crisis of the State. O'Connor's 1973 book clearly analyzes the political dynamics of state budget growth and its antithesis, popular resistance to burgeoning tax costs.

FOR O'CONNOR, these political dynamics are intimately bound to economic interests, and The Fiscal Crisis begins with a breakdown of the economy into its public, competitive, and monopoly sectors. Each sector is scrutinized for the demands it makes upon the state, and for its access to political power.

Because long-term trends point to the ascendancy of the monopoly sector at the expense of the competitive, O'Connor focuses on the economic interests and political leverage of monopolies. Two economic pressures with major political ramifications emanate from this sector. First, the monopoly sector expands based on "increases in physical capital per worker and technical progress," not increased employment. Monopolies therefore grow without creating jobs, forcing the state to confront the needs and costs of high unemployment.

Second, monopoly capital requires enormously expensive forms of economic rationalization in order to increase labor productivity and reduce labor costs. Such investments as mass transportation, mass education, the construction of projects such as airports and electric, gas, water and sewer plants are costly and often unprofitable ventures for private capital. Monopoly capital is best served by the state socializing these social capital costs.

But contradicting the growing pressures to expand state services and expenditures is a crisis of state revenues. Who pays the growing bill for massive government outlays is quickly becoming a highly sensitive political issue. Political lines on the tax question are again being drawn on the basis of economic interests.

Within the private sector, for instance, monopolies can pass the incidence of corporate taxes back to their employees or forward onto the consumer. Competitive capital is less flexible however, and therefore more resistant than monopoly capital to increased corporate taxation. O'Connor argues that political tensions between the federal government and state and municiple governments reflect the split within the private sector as monopoly capital most strongly influences the executive level in opposition to competitive capital's foothold at the state and local levels.

THE PRIVATE SECTOR as a whole attempts to protect profits by passing the tax burden onto working people--either as consumers or as producers. This class conflict provides an objective basis for the politicization of workers.

But divisions also exist between workers in each of the three sectors. These tensions produce antagonisms between the suburb and the inner city, and by general private sector sentiment against wage increases in the public sector. O'Connor adds, however, that these tensions are superficial, suggesting several means whereby working people can unite to secure democratic control of state expenditures.

The private sector attempts not only to pass the tax costs of public services onto working people, but also to restrain costs by cutting down on profitless social services such as welfare and unemployment insurance. Monopoly capital is better prepared to pass streamlined social welfare costs along, and has historically been ready to accept moderate expenses in order to maintain a stable work force. But smaller, more competitive capital continually presses for cuts in social welfare spending.

Popular resistance to high taxation can be traced to several sources. Particularly in California, the Proposition 13 property tax cut was supported by fixed income and pensioned people hurt by exorbitant taxes. Commercial and residential landlords also supported reduced property taxes, and popular discontent with the priorities and quality of public sevices swelled Proposition 13 forces.

More generally, competitive business is hurt by high taxation, as are landlords and fixed income people. O'Connor suggests that eventually popular antipathy towards government spending programs and priorities can be organized politically, and will shift its emphasis away from drastic cuts in government spending and towards the reform of government spending priorities.

TRADITIONALLY SECURE and docile public servents--such as teachers--are becoming increasingly politicized around the issues of wages, working conditions and ultimately control of state budgeting. Links are also developing between public servents and their clients--between teachers and parents, welfare workers and recipients, social workers and the disadvantaged.

O'Connor sees the increasing fiscal burden on the state and consequent conflicts over taxation as ongoing and intensifying challenges to contemporary capitalism. Although he acknowledges the impact of cost sharing and other schemes to support rising state expenditures he argues that the fiscal gap is a basic structural implication of capitalism. The current fiscal crisis, O'Connor concludes, results from the contradiction within a state which socializes costs without socializing profits.