State tax receipts down sharply

March 31, 2010

By JOHN SEILER

A new study by the U.S. Census Bureau found that the tax receipts of the California state government dropped 13.9 percent. That was fifth highest of the states, with the higher states being: Alaska 41.2 percent drop in revenue, Arizona 17.9 percent, South Carolina 15.5 percent and New Mexico 14.1 percent.

It also found, “California, Arizona, and South Carolina reported the sharpest percent decline in individual income tax in 2009, decreasing 20.4 percent, 42.5 percent, and 29.6 percent from 2008 respectively.”

The big drop in income tax revenue – 20.4 percent, compared to 13.9 percent for all 50 states combined – again showed the volatility of California’s state income tax collections. The taxes rise sharply – and are quickly spent – during booms; but then crash sharply during recessions, causing immense deficits. I discussed this volatility, and a possible solution, in my article two months ago for CalWatchDog, “Flat Tax Idea Revived.”

Last July 2009, Dan Walters wrote, “The volatility, born of the state’s reliance on personal income taxes from a relative handful of high-income Californians, is the underlying factor in revising the current state budget to close a whopping deficit.” Now, seemingly lost in a “Twilight Zone” episode, the state is back with the same nagging problem again.

Tax increases didn’t work

The drop in taxes in 2009 came to $16.4 billion. It occurred despite a record $13 billion tax increase enacted by the Legislature and Gov. Arnold Schwarzenegger. When taxes were increased in February 2009, he commended the votes for it in the Legislature as “difficult but courageous, and just what California needs.” But it didn’t solve the endemic deficits.

Esmail Adibi said that in 2010 things actually are slightly better than the 2009 Census numbers because a modest uptick in revenues has reduced the ongoing gap between projected spending and tax receipts. He is director of the A. Gary Anderson Center for Economic Research and Anderson Chair of Economic Analysis. Business Week on March 30 reported that the 15 biggest states saw increases in revenues in January. California’s rose by 3.9 percent.

“The deficit won’t be as big as anticipated. That’s the positive news,” Adibi said. “We’ll close the year slightly better than at the beginning of the year. The bad news is that revenue still won’t grow enough to close the budget gap. And it’s going to continue next year. A slow recovery won’t be sufficient. You have to raise more money or sell more assets.

“The governor is asking for money from the federal government. We’ll get something, but the question is whether it will be sufficient or not.”

Things looked even gloomier to Sherry Bebitch Jeffe, senior fellow, School of Policy, Planning and Development at the University of Southern California and the political analyst for KNBC, Los Angeles. “It’s not good news” she told me of the drop in tax receipts. It makes budget negotiations even more difficult. “Democrats will not settle for cuts in spending. Republicans will not settle for tax increases. And that’s where we start.”

The “D” Word

Jeffe is one of the first to raise the possibility of default on California’s state bonds. “There will come a time when the state may face the position of default,” she warned. “That’s very dangerous. The state is in denial. That can’t last when we can’t sell our bonds. That can’t last when we can’t get a bridge loan to get by on the already lean tax receipts coming in. I don’t see the answer – the real answer. I don’t see the compromise yet.”

Just a year ago, after the tax-increase budget was signed by the governor, Treasurer Bill Lockyer observed, “This budget paves a major segment of the state’s road back into the bond market. We’re still assessing all the short-term and longer-term ramifications of the final product, but I believe investors will conclude this plan passes the credibility test.” Just how many more credibility tests the state can pass has yet to be seen.

Jeffe pointed out that voters tend to be more white and middle-class than the overall population. And that such voters have yet to be impacted sharply by a decline in state spending, such as on crucial infrastructure. Only when such voters are affected directly will they start to take drastic action at the ballot box. “There will have to be a lot of pain before people are focused on it,” she said.

Lack of Political Will

The “structural deficit” is the gap carried over year-to-year, despite the requirement in the California Constitution that the governor is supposed to submit a balanced budget every year.  The governor’s 2008-09 budget summary explained, “The structural deficit was created when the state added new, permanent spending increases that relied on these one-time revenue gains,” in the late 1990s.

Jeffe said that, beyond the current crisis, the state’s structural deficit remains because “they’ve  just been adding to it. They just keep dealing with it with blue smoke and mirrors. At some point we won’t be able to do that anymore.” (“They” being the Legislature and recent governors.)

Nor does she see much hope among the current crop of gubernatorial hopefuls: former Gov. Jerry Brown for Democrats, and eBay CEO Meg Whitman and state Treasurer Steve Poizner for Republicans. “They’re offering the same old thing: cut jobs, cut taxes. There is no realization of the way we are, the shape we are in fiscally and the way it’s going to be.”

John Seiler, an editorial writer with The Orange County Register for 19 years, is a reporter and analyst for CalWatchDog.com. His email: [email protected].

9 comments

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  1. EastBayLarry
    EastBayLarry 1 April, 2010, 07:08

    Default is inevitable. The question remains: What happens then?

    Reply this comment
  2. StevefromSacto
    StevefromSacto 1 April, 2010, 09:21

    “We don’t want to destroy government. We want to shrink it so we can drown it in the bathtub.” Grover Norquist, Americans for Tax Reform

    I am surprised you guys aren’t celebrating this news. You’ve effectively choked the state to prevent any new revenue (oil production tax, closing tax loopholes and eliminating tax breaks during this economic emergency, etc.). So the reduced tax revenue resulting from the economic downturn is a handy excuse for cutting even more public services–primarly those that go to the poor and sick.

    Reply this comment
  3. EastBayLarry
    EastBayLarry 2 April, 2010, 07:19

    Steve,
    Interesting quote. Of course the Alinsky point of view is to destroy the country by increasing entitlements until they are impossible to sustain. When everything collapses, you can then ‘remake’ the country in a way more friendly to “social justice”, i.e. “Redistributing the wealth”, i.e. socialism or even communisim.

    Is that your goal?

    Reply this comment
  4. stevefromsacto
    stevefromsacto 2 April, 2010, 21:29

    Social justice is communism? Larry, I took you for more than just a Glenn Beck clone.

    How about this one: “Whatsoever you do for the least of my brothers, you do for me.”

    Alinsky? No, actually it was Jesus Christ, although it’s probably been erased from the right-wing evangelical version of the Bible.

    Reply this comment
  5. EastBayLarry
    EastBayLarry 3 April, 2010, 21:53

    Steve:
    Where to start?
    Can you convieve of the difference between a voluntary act of charity and a government mandate?

    Reply this comment
  6. StevefromSacto
    StevefromSacto 5 April, 2010, 16:10

    I fervently wish that charity alone could help those unfortunate people who need support..you know, those bums like elderly Alzheimer’s patients who refuse to work. But charity alone cannot fill the gap. So it comes down to whether you believe that our government should step in, using all of our tax dollars. You obviously don’t. Apparently you would have people go without…without health care, without food, without heat, etc., rather than pay one dime of your precious tax dollars.

    Reply this comment
  7. EastBayLarry
    EastBayLarry 6 April, 2010, 06:36

    The fact remains, tax revenues are down. So where are the dollars for all this ‘social justice’ going to come from? The feds can just print more when needed, but what can California do?

    “Spreading the wealth” just results in nobody having enough because the bureaucrats eat too much while doing the spreading. A better solution is to encourage a dynamic and expanding economy where the ‘average’ person can afford to donate to the causes they believe in.

    Reply this comment
  8. PRI
    PRI Author 7 April, 2010, 16:41

    There’s no more money. Tax increases only would make matters worse. Millions are going to be hurting, especially the sick and poor. That’s what happens when you mismanage a state government for decades.

    — John Seiler

    Reply this comment
  9. SDSD
    SDSD 30 November, 2010, 17:22

    It’s interesting how Steve, like most liberals, fails to notice how even though CA passed the biggest tax rate hike in history last year, tax receipts are down sharply. So apparently the solution is still to raise tax rates even more, the brain-dead logic being that maybe *this time* the state will get more revenue. The definition of insanity is doing the same thing over and over again, expecting a different outcome.

    By the way, you’re more than welcome to part with more of your own ‘precious’ tax dollars and give it away to the state. I’ll hold my breath while you go do this.

    Reply this comment

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