LAO: Brown Numbers Don’t Compute

JAN. 12, 2012


Gov. Jerry Brown’s budget proposal contains more smoke than a forest fire. More mirrors than a funhouse. And more empty promises than a presidential candidate’s platform.

So much for his solemn pledge, in his Inaugural Address a year ago, “No more smoke and mirrors on the budget. No empty promises.”

The numbers are in the new report by the California Legislative Analyst’s Office, “Overview of the Governor’s Budget.” The budget under the microscope is for fiscal 2012-13, which begins July 1, 2012.

The LAO writes that the governor’s proposed $6.9 billion tax increase, to be put on the November ballot, is the “cornerstone” of the budget. Without it, the budget numbers collapse like a cheap card table. The increase would impose an extra half-cent sales tax, raising the state sales tax to about 8.5 percent in most counties. And it would impose an additional 2 percentage points of income tax on the wealthy, bringing the top state tax rate to 12.3 percent. That would make it the highest in the nation.

Election Far Away

But the tax increase hasn’t even been passed yet by voters. The election to authorize it is more than nine months off. And the last tax increase voters approved was in 2004, at the height of the real-estate bubble. That was Proposition 63, a 1 percentage point tax increase on millionaires dedicated to mental-health programs.

According to Ballotpedia, ‘The “Yes on 63’ campaign spent approximately $4.7 million. The largest donor was the California Council of Community Mental Health Services, which gave $733,389 to the campaign. The California Healthcare Association gave $541,735. The California Teachers Association kicked in another $302,555.[6]

“In comparison, opponents of the measure spent virtually nothing, with two separate ‘No on 63’ campaign committees spending a cumulative total of just over $13,000.00.[7]

Despite almost no opposition, and the tax falling only on all those filthy rich people, Prop. 63 still got only 54 percent of the vote.

The conditions in 2012 are far different from those in 2004. The real-estate bubble burst in 2007, leading to the real-estate crash. Real estate still hasn’t recovered, and might not for years.

In November 2004, the month of the election, unemployment was just 5.9 percent in California. But in November 2011, the last month available, it was nearly double that, at 11.3 percent.

In 2004, the tax increase initiative sparked just $13,000 in opposition spending. In 2012, anti-tax forces already are planning on spending tens of millions of dollars fighting any tax-increase initiative, whether Brown’s or the others being talked about, such as Molly Munger’s $10 billion yearly tax increase.

I peg the odds of any tax increase passing in California this November at only about 10 percent.

Not Even $6.9 billion

But the LAO also calculates that Brown miscalculated the $6.9 billion in swag. It only would bring in $4.8 billion a year.

Put another way, to get the $6.9 billion Brown wants, the tax increase would have to rise by another $2.1 billion above the $4.8 billion amount, a 44 percent increase. For that the state is supposed to support another tax assault on businesses and jobs?

The LAO’s analysis warned, “Currently, we forecast that the proposal would generate $4.8 billion for the 2012-13 budget process, or $2.1 billion less than the administration’s estimate. Our estimates of the initiative’s revenue increases in later years also are lower than the administration’s. The reasons for our lower estimates are essentially the same as the reasons for our differences in baseline revenues…

“Both our office and the administration agree that the initiative revenues will likely prove to be volatile, given that a large portion of them will relate to upper-income tax filers’ capital gains and other nonwage income.”

“Volatile” is the right word.

Tax Bonanza

Bloomberg reported today, “The potential for California (STOCA1) to see a tax windfall from a Facebook Inc. public stock offering this year demonstrates how much the state relies on capital-gains taxes, a volatile revenue stream that hampers its credit rating.

Menlo ParkCalifornia-based Facebook, the world’s most-used social-networking site, is considering the largest initial public offering for an Internet company on record, a person familiar with the plans said last year. Estimated at $10 billion, the offering would make instant millionaires of company employees and require the state to adjust its revenue forecast to reflect additional capital-gains taxes they’d pay, the state’s legislative analyst said yesterday.

“That kind of unanticipated boost shows the boom-and-bust cycle that capital gains taxes often inflict on California’s budget. In fact, capital-gains tax revenue as a percentage of the state’s general fund plummeted from 12 percent to just 3 percent between 2007 and 2009 as investors pulled away from the stock market, a decline of $9.3 billion, according to state finance department figures.”

This would seem an ideal time to propose switching California to a revenue-neutral, flat tax of the sort Gov. Brown himself advanced when he ran for president 20 years ago. His friend, economist Arthur Laffer, even has devised a great flat-tax reform for California, as I reported on two years ago. So Brown knows what can be done.

But no. Brown refuses to innovate. Instead, he brings out the old root-canal tax proposals favored by the government unions that funded his campaign in 2010.

Meanwhile, the state’s economy, despite a modest recovery, continues to stagnate — barring the occasional Facebook public offering that affects only Silicon Valley.

On Jan. 10, Controller John Chiang released his “Summary of State Finances in December 2011.” It found, “Compared to estimates found in the Governor’s newly proposed 2012-13 Budget, total General Fund Revenues in December 2011 were $165.2 million worse (-2.0%) than expected. Personal income taxes were $69.8 million lower (-1.4%) than projected and corporate taxes were $19.5 million below (-1.4%) the estimates in December.”

Which means there’s no new boom exploding revenue to cover Brown’s budget, which includes $6 billion in new spending. There’s no real-estate bubble. There’s no dot-com boom. There’s just modest growth.

The year will show how much more smoke Brown will blow, and how many mirrors he will erect, to hide what’s really going on and hornswoggle voters into passing his tax increase.



Write a comment
  1. Beelzebub
    Beelzebub 12 January, 2012, 13:46

    “I peg the odds of any tax increase passing in California this November at only about 10 percent”

    You’re really sticking your neck out on that call. I sure hope you’re right. You have more faith in the CA voters than I do.

    Don’t ever underestimate Jerry Clown. He’s played the politic’s game for many, many years. He’s slicker than dog crap. 4-5 months prior to the election he’s going to start threatening to cut public services bigtime. You will see more TV ads with a burglar breaking into a single woman’s house – and she gets a busy signal when calling 911. These people are masters at propoganda. Their jobs depend on it.

    Reply this comment
  2. David H
    David H 12 January, 2012, 20:05

    Let’s hope Jerry bears the fruit of his early career decisions to unionize the government work force and legalize sodomy. That would be a fitting end.

    Reply this comment
  3. queeg
    queeg 13 January, 2012, 10:09

    How can we elect three governors in a row who made gigantic policy mistakes almost monthly???

    Brown is much smarter than this….socialist enviro regulations and this doomed rail dealeee are drastically stunting our economy…

    Grey Coupon for your Top Ramen anyone???

    Reply this comment
  4. ElGato
    ElGato 13 January, 2012, 16:33

    I thing what Moonbeam meant by “No more smoke and mirrors…” was that he’ll stop smoking pot and snorting cocaine. Gov. Clown needs to go to rehab- he’s spent way too many years in The Retard Chamber, a.k.a. politics.

    Reply this comment
  5. stevefromsacto
    stevefromsacto 16 January, 2012, 11:38

    I really want to thank the LA Times’ George Skelton for putting in one convenient place all the ammunition needed to blow the right-wing MYTHS about California taxes out of the water! Read and Learn!

    Voters Need Facts, not Myths

    State government’s level of taxing and spending is about the same today as it was decades ago, when Ronald Reagan was governor.

    Californians are heading into an intense, critical debate over the level of public service they’re willing to pay for. So it’s time to puncture some myths.

    Everyone’s entitled to his own opinion, as the late Daniel Patrick Moynihan used to say, but not his own facts.
    Voters owe it to themselves to separate myth from fact as they begin pondering Gov. Jerry Brown’s planned November ballot initiative to temporarily raise about $7 billion annually from higher income taxes on the rich and sales taxes on everyone. It’s either that or deeper cuts in education and other services, the governor warns.

    Myth No. 1: There’s no such thing as a temporary tax increase. They all become permanent.

    Fact: That’s just talk-show spiel. Temporary state taxes almost never become permanent.

    There’s only one exception that I can recall. A temporary half-cent sales tax turned into essentially a permanent local tax in 1993 with the voters’ approval. All the revenue was dedicated to local law enforcement and fire protection.

    Myth No. 2: Taxes have gone through the roof in California.

    Fact: They’ve been held down. Even if Brown’s tax hikes are approved by voters, the state tax burden will be basically what it was back when Ronald Reagan was governor in the 1970s.

    In Reagan’s last year in Sacramento, state taxes amounted to $6.89 per $100 of personal income. Currently, the level is $6.45. With the hikes, it would be $6.67, according to the State Department of Finance, which charts such data. The high tax point was $7.96 in 1999.
    Also, according to the finance department, California ranks 19th nationally in state and local taxes and fees, at $16.42 per $100 of personal income. The highest-taxing states relative to income are Alaska, Wyoming and New York.

    Myth No. 3: California’s spending has been out of control.

    Fact: It’s on a relatively tight rein. The deficit-ridden state General Fund has been cut by 16% in the last four years, the overall state budget by 2%.

    One example: Welfare, the poster child of waste for many on the right, has been slashed to the grant levels of 25 years ago: $638 monthly for a family of three.

    But let’s go back to that conservative icon Reagan. General Fund spending per $100 of income is lower today, $5.14, than it was in his final year, $5.89.

    Historically, what really bumped up state spending was Proposition 13 in 1978. That property tax cut prompted the state to begin doling out money to revenue-robbed local governments and schools.

    Myth No. 4: California suffers from an exceptionally bloated bureaucracy.

    Fact: That’s baloney. Again, the Reagan era puts it in perspective. State government employs roughly the same number of workers per 1,000 population today as then, nine.

    Moreover, we have the fifth-lowest number of state employees relative to population in the nation, according to Steve Levy, executive director of the Center for the Continuing Study of the California Economy. We’re 23% below the national average.

    Make that also the fifth-lowest nationally when state and local government employees are combined.

    Texas’ bureaucracy is bigger relatively, both state and local.

    “We’re understaffed compared to the national average,” Levy says. “We’re providing services with far fewer employees. It’s pretty dramatic.”

    But hold on! Time out!

    How big a slice of the budget is going to California’s state employees — in pay, pension and perks — compared to 20 or 40 years ago? Sure, it’s a relatively trim workforce. But how much of the tax pie is it consuming compared to the Reagan era?

    Couldn’t get an answer to that one from the finance department. I’ll keep trying.

    Myth No. 5: California teachers are pampered and overpaid.

    Fact: My wife is a retired teacher, so I’m biased. But it’s blarney.

    Yes, the average salary for California teachers, $69,400, is the second-highest in the nation, behind New York’s. But California’s cost of living also is very high; resale housing prices here are 75% steeper than the national average.

    Moreover, California teachers may have to work harder. We have the nation’s fourth-lowest ratio of K-12 educators to population, Levy says. California is 20% below the national average; Texas is 25% above. Meanwhile, our proportion of students to population is above average.

    California also ranks 46th in K-12 spending per pupil and 47th as a percentage of income.

    Funding for elementary schools through community colleges has been chopped by $9 billion in the last four years, from $56.6 billion to $47.6 billion. Brown says he’ll need to whack $4.8 billion more if his taxes aren’t approved.

    We could go on and on.

    But let’s acknowledge one fact: There’s too much government waste and always has been. The Times regularly unearths it. Democratic legislators could do a better job of rooting it out.

    Brown is proposing to eliminate a few dozen boards and commissions he deems wasteful. That’s probably good policy, but it would save only peanuts. It’s sort of like his clamping down on the use of state cars and cellphones. Nice media, but not much money.

    More important, with serious billions at stake, the governor seems to be trying to persuade the Legislature to buck labor and adopt major public pension reform, including for local government. That’s where most of the extravagance occurs, especially among executives and politically powerful public safety officers.

    That certainly will — and should — be part of the heated debate over taxes and services.

    And whichever opinion prevails, it should be based on fact, not myth.

    Reply this comment
  6. David H
    David H 17 January, 2012, 14:05

    The fact is that during the Raygun years we had prosperity, called stagflation. Billy lover years too. Though most of the “prosperity” was a result of borrowing, not good principled growth. We don’t have that now, so it’s time to adjust. It had to come to an end. If you don’t work you don’t eat. If you don’t pay your debts no one will lend to you anymore. But only someone too young, sheltered or government employed would say that we don’t have more exclusive government funded pension retires living among us, they are everywhere, building big homes, flying expensive airplanes, driving new cars and truck every year, and arrogant. Maybe I just see it more because I live in a retirement community. And we have had a huge increase in government intervention (can you say cost) and regulation. Steve you always cry about the poor,and I agree, but the poor can’t even go and get a job without doing something illegal today. It either takes a business permit, a contractors license, a public health permit, or a union card or some kind of degree. Why do you think so many people are standing around the streets? You must be ignorant.

    Reply this comment
  7. stevefromsacto
    stevefromsacto 17 January, 2012, 18:22

    “only someone too young, sheltered or government employed would say that we don’t have more exclusive government funded pension retires living among us, they are everywhere, building big homes, flying expensive airplanes, driving new cars and truck every year, and arrogant.”

    I live in a retirement community also, David, have never worked for the government or been sheltered (whatever that means). But there are a hell of a lot more mortgage bankers, Wall Street brokers and other vulture capitalists with their big homes, expensive airplanes, new cars, etc. than there will ever be government retirees, who receive an average pension of less than $25,000 a year.

    But you must have some lovely ganja growing in your retirement community if you see retired DMV clerks in private planes or new cars.

    Reply this comment
  8. David H
    David H 18 January, 2012, 10:31

    50 yr. old retired Vallejo police officer with a nice Bonanza airplane that burns 18 gallons an hour, not his first plane by the way. Retired school teacher couple in a $850,000 custom built home, plenty of money, shinny cars, plenty of time. Retired police officer, head of neighborhood watch, drives two new Ford’s every year, one pickup, one sedan, brand new custom built home, new boat, plenty of money, much free time to mind everybodys business. The local government municipality employees are the highest paid jobs in the vicinity. They make more money than any drug dealer I have heard of.

    Now I’m not opposed to people earning money and spending it the way that they want if they earned it honestly, but when we are talking about fiscal policy, tax dollars, and huge spending deficits, then we have a say in how the money is spent. If you want to reform wall street trading, mortgage banking, then you should all means do it. But don’t tell taxpayers to fund your wall street envy lifestyle.

    Reply this comment

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