State tax receipts down sharply

by CalWatchdog Staff | March 31, 2010 10:52 am

March 31, 2010

By JOHN SEILER

A new study[1] 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[2].”

Last July 2009, Dan Walters wrote[3], “The volatility, born of the state’s reliance on personal income taxes[4] 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[5] 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[6] and Anderson Chair of Economic Analysis. Business Week on March 30 reported[7] 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[8], 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[9], “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[10], “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[11]. His email: [email protected][12].

Endnotes:
  1. A new study: http://www2.census.gov/govs/statetax/2009stcreport.pdf
  2. Flat Tax Idea Revived: http://../2010/01/15/new-flat-tax-idea-revived/
  3. wrote: http://www.sacbee.com/2009/07/17/2033313/dan-walters-tax-volatility-plagues.html
  4. income taxes: http://topics.sacbee.com/income+taxes/
  5. $13 billion tax increase: http://www.bloomberg.com/apps/news?pid=20601103&sid=aLQN_7PifIug&refer=us
  6. A. Gary Anderson Center for Economic Research: http://www.chapman.edu/argyros/asbecenters/acer/default.asp
  7. reported: http://www.businessweek.com/news/2010-03-30/california-revenue-shows-state-cash-collapse-ending-update1-.html
  8. Sherry Bebitch Jeffe: http://www.usc.edu/schools/sppd/faculty/nontenure/bebitch_jeffe.html
  9. observed: http://www.bloomberg.com/apps/news?pid=20601103&sid=aLQN_7PifIug&refer=us
  10. explained: http://2008-09.archives.ebudget.ca.gov/BudgetSummary/INT/32270914.html
  11. CalWatchDog.com: http://calwatchdog.com/
  12. [email protected]: mailto:[email protected]

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