Tax hike could just go to pensions

April 4, 2012

By Wayne Lusvardi

Looks like California won’t need a tax hike after all—except to fund pensions.

Economist Jeff Michael is the director of the University of the Pacific’s Business Forecast Center in Stockton. He tentatively indicates that a proposed state tax hike in November may not be necessary.

Michael was asked to explain the mystery of why Gov. Jerry Brown recently told the Wall Street Journal that the State Gross Domestic Product had increased by $90 billion in 2011, but state Controller John Chiang reports tax revenues were down 22 percent in February 2012 compared to February 2011.

Michael said that the “primary reasons Controller Chiang is reporting tax revenue is down compared to last year is because the previous two-year tax rate increases expired.”  The 2-year tax, signed into law by then-Gov. Arnold Schwarzenegger in 2009, was temporary until the economy recovered.

Gov. Brown’s budget does project a revenue increase of about $3 billion, or about 3.5 percent of the general fund, even if his tax-increase initiative fails.  Michael said this is not an inflation impact because it is roughly equal to the projected nominal GDP in Brown’s budget.

Michael pointed out that “if the economy picks up a bit more as some project, then nominal GDP growth could be closer to 5 percent.  The state could see $4 to $5 billion in revenue growth.”

If a $4 to $5 billion tax revenue increase should materialize, no tax increase might be needed at all. Or at least the tax increase could be smaller.

Another reason Michael says tax revenue isn’t growing is that the Legislature and governor have been holding off balancing the budget.  He wrote, “The state will begin the year in a budget hole from this year’s deficit that will certainly exceed the roughly $3 billion in expected revenue growth for next year.”  But California has apparently already started spending increases again even before tax revenues have increased.

State Redevelopment Spending Still Out of Control

On March 26, the Legislature was still spending like there was no proverbial tomorrow or state budget deficit.  The Assembly approved Assembly Bill 1585, allowing defunct redevelopment agencies to spend $1.4 billion of their remaining $2 billion in revenues for affordable housing.  The money would be spent instead of transferring it to the state general fund to plug the state budget deficit.

State funding for affordable housing programs is unnecessary as long as the median state home price is $239,000.  This is 67.4 percent below the 2006 peak home price in the real estate market.

Apparently the governor and legislature believe they can go back to their old tax and spending habits because of a rise in state Gross Domestic Product.

Brown Puffs Up State GDP for Tax Hike? 

Speaking at a conference at the Wall Street Journal over the weekend, Brown said the state Gross Domestic Product rose by $90 billion, or 4.7 percent last year.  However, the website usgovernmentspending.com reports that California’s GDP increase was only $58.7 billion for 2011.  Economist Jeff Michael estimates that, when final figures are reported for 2011, the state GDP increase might be around $70 billion.  Michael added:

“I can’t comment on where he [Brown] got the $90 billion GDP increase, but 60 or 70 or 90 is generally irrelevant to the necessity of the tax increase and, plus or minus $1 billion to 2 billion on general fund tax revenue which is normal uncertainty.”

Bottom Line

The governor is apparently puffing up the state’s increased GDP for 2011 to justify that there is an economic recovery to pay for a tax rate increase. But if there were a $90 billion increase in state GDP, as Brown contends, there would be no need for a tax rate hike.  Existing tax rates would generate enough revenue, combined with budget balancing and more redevelopment fund transfers to avoid any need for a tax increase.

The Legislature is holding off balancing its budget for this year to make it appear that there is a deficit requiring a tax rate hike.

The Assembly’s approval of AB 1585, authorizing spending $1.4 billion in redevelopment housing fund,s indicates it doesn’t want to balance the state budget.  By denying the general fund this $1.4 billion, the Legislature would make it appear it is running a larger budget deficit and, thus, needs a tax rate increase.

If the above rosy scenario should take place, the state could see taxes rise on their own by $5 billion due to economic growth. On top of that would be slapped could reap a $10 billion tax windfall — if the voters approve Brown’s tax increase.

Where would the windfall go? Let’s spell it: P-E-N-S-I-O-N-S.

 

17 comments

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  1. Beelzebub
    Beelzebub 3 April, 2012, 22:40

    First things first. The improving economy was bought with massive amounts of debt and money printing, not with productivity or real earnings. If every time you maxed your credit limit on your CC you were able to raise your limit another $20 grand would that make you a wealthy man? Nope. And how many times could you pull that off and still meet your required minimum payment? The damage sustained from the massive global meltdown has not even been honestly addressed. We’ve been in survival mode for 4 years now. The entire economy is leveraged to the hilt. Where do you think GDP would be today if not for the bailouts, ZIRP, borrowing and money printing? The politicians will not allow it to deleverage naturally since GDP would take a big hit and their failed strategy would get exposed. So they will keep the economy on the life support machine and pump funny money into it until they can’t anymore. Look, the experts are saying the Case-Shiller housing index is expected to fall another 5-10 points in the coming year. California simply can’t recover until RE rebounds. Don’t hold your breath.

    Reply this comment
  2. Tom in SoCal
    Tom in SoCal 4 April, 2012, 08:32

    The signs are there if anyone cares to note them of the oncoming recession that will occur by the end of this year.

    Now that the Fed has turned off the spigot of QE and indicated that it will not turn it back on, you will start to see the slowdown and layoffs appear.

    In our own business we have already started to see this slowdown and we have always been on the leading edge of recessions and recoveries.

    Reply this comment
  3. Beelzebub
    Beelzebub 4 April, 2012, 10:00

    Look, for the first 3 months of 2012 the feds have run up another $360B on the federal balance sheet. That’s $1.4T annualized. That number represents FAKE DEMAND for goods and services in your economy. It’s another injection of fiscal heroin into the economy to keep the addict feeling good. Your nation’s currency is being counterfeited by the Treasury and Fed Reserve. The damage? Walk through Home Depot and price the building materials as compared to 3 years ago. Price fertilizer. Price fish, meat, vegetables and other various foodstuffs at your favorite supermarket. Price gasoline. Yesterday I paid $4.30. You think that’s going to decline with summer approaching? They will tell you that Iran-Israel’s exchange of heated words and speculation is causing the increase. That’s total BS. Too much money chasing too few goods is the reason you’re paying over $4/gal. Yet they tell you inflation is under control! 😀 Pull my other thumb, Obama! And they tell you that the economy has de-leveraged. 😀 That’s a bald-faced lie! You see, they know VERY WELL that if they stop the fiscal heroin injections that we fall into a DEFLATIONARY DEPRESSION! But like with the heroin addict, they can pull that stunt only so many times until the addict’s liver fails and he turns bright yellow and exhibits shallow, labored breathing. Is it any surprise that the other global superpowers have held meetings (excluding US representatives) in which contingency plans are being developed for an alternative to a global reserve currency?

    Reply this comment
  4. Rex The Wonder Dog!
    Rex The Wonder Dog! 4 April, 2012, 14:35

    Beelz, home prices will not recover to the 2005 levels in our lifetime.

    We are far from the bottom b/c so many properties are still upside down-nearly 5 years after the recession started. 5 YEARS!

    We have close to 2 million upside down homes, a shadow inventory of REO properties. I think the BEST option at this point-and I hate to say this because it is socialist, but it is the only way out- is to write the red ink off and allow the homeowners to reset their properties to market. The bansk can take the tax write off. THEN we will be at ground zero and will not have to worry about the problem for another 5-15 years.

    Reply this comment
  5. queeg
    queeg 4 April, 2012, 15:34

    Smart money is buying huge chunks of residential housing as an inflation hedge…immense wealth will be in the hands of property investors. Great news. The new rich!

    For the rest of you moaning and groaning about the baddie rich….shuck the pity parties….rental housing will make you rich beyond your comprehension!!

    This may be your last chance of not being a lifetime miserable loser….

    Reply this comment
  6. Beelzebub
    Beelzebub 4 April, 2012, 16:33

    “Beelz, home prices will not recover to the 2005 levels in our lifetime”

    I suspect you’re right but perhaps a little optimistic. Currently anyone who bought post 2003 are underwater. That was 9 years ago. Remember those idiots who took Obama’s $8000 home purchase credit bait right after the meltdown? Today they are underwater. I warned them.

    To flush out all the bezzle the RE market will have to drop another 30-40%. A home should cost no more than 3-4 times the average income in any given area. They’ve created a huge dilemma. Any which way they turn to solve the problem somebody gets screwed royally.

    “I think the BEST option at this point-and I hate to say this because it is socialist, but it is the only way out- is to write the red ink off and allow the homeowners to reset their properties to market. The bansk can take the tax write off”

    That’s a nice textbook solution, rex. In reality it would create a civil war. Besides, such a plan would screw the old money who make the laws. Never happen. If anyone gets screwed it will be the worker bees on the bottom.

    There really is no good solution. We will crawl along like Japan and continue deficit spending until the bond markets implode.

    Reply this comment
  7. Chris
    Chris 4 April, 2012, 19:28

    “write the red ink off and allow the homeowners to reset their properties to market”

    Beelz,

    That is the BEST laugh I had all day. Reset their property values. LOL! Can I reset my college loan rate?
    The only way to get out of this mess is raise interest rates so people would move it out of the sick stock market and back into small banks that loan it out. It is a win win. Retired people can make a return on their money in the bank and it can be loaned out to start businesses. The government is artificiality keeping interest rates low. It is killing the economy!

    Reply this comment
  8. Chris
    Chris 4 April, 2012, 19:35

    Let me know when the first California City goes bankrupt.

    That is the ONLY thing that will get the retired state teachers and state workers to renegotiate their platinum plated entitlement payouts. They know it is better to get something than near nothing. And that is what will happen when the cities start falling like dominoes.

    And you think people hate unions now.

    Reply this comment
  9. Beelzebub
    Beelzebub 4 April, 2012, 20:07

    “write the red ink off and allow the homeowners to reset their properties to market”

    “Beelz,

    That is the BEST laugh I had all day”

    That wasn’t my quote, Chris. Go read the posts again.

    “The only way to get out of this mess is raise interest rates so people would move it out of the sick stock market and back into small banks that loan it out. It is a win win”

    Are you aware that for every one percent rise in the interest rates that it would cost another $100B to service the interest on the national debt?

    Like I said before, Chris. There is no good solution to the mess they’ve gotten us into. Either way they turn – we’re screwed. Your solution sucks too. There is no good solution. Only pain. And the longer they delay in addressing the problem – the greater the pain will be.

    Reply this comment
  10. Rex The Wonder Dog!
    Rex The Wonder Dog! 4 April, 2012, 20:09

    Chris says:
    “write the red ink off and allow the homeowners to reset their properties to market”
    Beelz,
    That is the BEST laugh I had all day. Reset their property values. LOL! Can I reset my college loan rate?

    Chris, there is over $1 TRILLION in student loan today and $350 BILLION is 30 days or more past due. Yes, your college will have to be reset also.

    Chris says:
    Let me know when the first California City goes bankrupt.

    That was Vallejo in 2008, and Stocketon (and maybe San Jose) in 2012.

    Reply this comment
  11. Beelzebub
    Beelzebub 4 April, 2012, 20:48

    Chris,

    A word to the wise:

    I read today that some colleges and universities are refusing to honor transcript copy requests from students who are 30 days or more late in student loan payments. The article I read was about Temple University.

    So apparently the degree does not belong to the student anymore. It belongs to the university. And the universities feel that they can withhold your records if you fail to make your payment – even though the university suffers no financial harm since the loan was guaranteed by the US government. But somehow the universities feel that they can retroactively add terms and conditions to the degree after the course of study has been successfully completed!

    Welcome to the Twilight Zone!

    In the meantime be sure to stock up on certified transcripts!

    Reply this comment
  12. queeg
    queeg 5 April, 2012, 08:12

    It appears a generation of takers is among us….write down bad loans and let contract law go POOF!!!

    It is easy for unabashed takers to lecture the producers…..me…me..me….give me more….your bad rich guys….your mean….

    Grow up…pay up…bk up….and shut up!

    Reply this comment
  13. Beelzebub
    Beelzebub 5 April, 2012, 08:32

    Hilarious coming from a guy who defines a ‘producer’ as an institution that makes bad casino bets then forces the taxpayers to eat it’s losses – while charging 25% penalties for late fees on CC debt while paying .3% interest on passbook savings accounts. 😀 Crony capitalism gone wild! 😀

    Reply this comment
  14. Rex The Wonder Dog!
    Rex The Wonder Dog! 5 April, 2012, 09:44

    queeg says:
    It appears a generation of takers is among us….write down bad loans and let contract law go POOF!!!

    You mean like those Wall Street investment banks and hedge-funds leveraged 300-1, passing off loses to the taxpayers while keeping the profits-is that whom you speak of Queeg, with Goldman Sachs leading the way, being the “takers”, yes, for once queeg you’re correct, those dirtbags and TARP was a scam, and those “takers’ are a national disgrace!

    Thank you for pointing thta out.

    Reply this comment
  15. queeg
    queeg 5 April, 2012, 11:18

    YEP….takers and whiners so eloquent on this site continually show contempt and envy of producers…

    Reply this comment
  16. queeg
    queeg 5 April, 2012, 11:20

    Perhaps this is an OCCUPY site????

    Reply this comment
  17. Rex The Wonder Dog!
    Rex The Wonder Dog! 5 April, 2012, 21:53

    Queeg, stop it you’re killing me with your bellyaching and griping, the truth can be painful, deal with it 🙂

    Reply this comment

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