Is the state stubbornly running toward financial trouble?

budget financeIt’s politically popular to rail on the One Percent and demand top earners pay their “fair share.” But they actually already pay a large share, fair or not, which analysts predict could be disastrous to California in the event of an economic downturn.

Actually, nearly half of the state’s personal income tax revenue comes from the top 1 percent of earners — 150,000 individual tax returns. And personal income tax revenue is 65 percent of total revenue, which means the One Percent provides 33 percent of the state’s total revenue. 

Besides volatility of the revenue stream — the One Percent’s personal income comes largely from capital gains, which are generally tied to the stock market — what happens if a Mark Zuckerberg or a Larry Ellison — #6 and #7 on Forbes’ list of wealthiest people in the world — leaves the state?

In New Jersey, another top-heavy state, one billionaire relocated to Florida, leaving as much a $140 million hole in the budget. 

Few in California dispute the over-reliance on top earners is an issue. It’s in Gov. Jerry Brown’s budget summary and even the credit rating agencies Moody’s and Standard & Poor’s have warned against it. However, there is conflicting opinions of what needs to be done. 

There could be tax reform, but is that a flattening of the tax code? Or a shift to sales tax on services? Higher property taxes? Would the solution be revenue neutral, meaning tax increases in one area are offset with decreases elsewhere? And what are the new consequences that might come with new tax dependencies? 

What requires a frank discussion has so far drawn only whispers. Many on the left feel that while this is a problem, the state is on a good path, with reduced debt, a growing reserve fund, increased education spending and moves to address the state’s unfunded liabilities.

Republicans, on the other hand, lose sleep over the more than $400 billion in debt (including unfunded liabilities), the warnings from credit agencies and outside groups saying the state will falter in an economic downturn and a proposed 12-year extension of a “temporary” tax imposed on the wealthiest of residents that they see as only perpetuating the problem. 

“I’m very concerned about where we’re at today,” said Assembly Republican Leader Chad Mayes of Yucca Valley. “You’ve got a very few people paying a vast majority of the revenue collected by the state. That doesn’t put us in a very good spot.”

A downturn is coming likely sooner than later

It’s a question of when, not if, an economic downturn will occur. In Gov. Jerry Brown’s budget introduction released earlier this year, it warned that California is in “its seventh year of expansion, already two years longer than the average recovery.”

“While the timing is uncertain, the next recession is getting closer, and the state must begin to plan for it,” the introduction continued. “If new ongoing commitments are made now, then the severity of cuts will be far greater — even devastating — when the recession begins.”

Tax reform

As a starting point, both sides agree some kind of tax-code overhaul is necessary. However, that’s about where the agreement ends. 

Senate Budget Chairman Mark Leno told CalWatchdog the state is “to a certain degree overly dependent on the highest wage earners,” and suggested increasing the vehicle licensing fee (the “car tax”) because it’s more stable, although he conceded the toxicity of the issue makes it difficult. For example, Congressman Ted Lieu, when he was in the state Senate in 2012, pitched the idea of increasing the car tax, but relented only five days later after backlash from hundreds of constituents, including his wife.

Another idea Leno, the San Francisco Democrat, pitched was extending sales tax to services, to reflect a shift in the state’s economy away from manufacturing, which he again agreed was “a difficult conversation to have.” He lauded the efforts of Sen. Robert Hertzberg, D-Van Nuys, who is sponsoring legislation to do just that. 

David Wolfe, legislative director for the right-leaning Howard Jarvis Taxpayers Association, suggested a simplified tax code — not quite a flat tax rate, but close. Wolfe said with the proper analysis sales tax on services is an idea “worth considering,” but it would require cuts elsewhere for their support.

“Of course, the overall sales tax rate would need to be lowered in order to make it revenue neutral because the base is being broadened,” Wolfe said.

Additional burdens

There are a few programs that limit the state’s flexibility, even though the individual programs may be beneficial:

  • Prop. 13 capped the rate property taxes could increase annually at two percent.  
  • Prop. 98 requires that a large percentage of the state’s general fund be spent on education. 
  • Prop. 2, also known as the Rainy Day Fund, sets aside a certain amount of money annually to buffer the budgetary effects of an economic downturn. However, even if fully funded it would only reserve 10 percent of the general fund tax revenues.

“While a full Rainy Day Fund might not eliminate the need for some spending reductions in case of a recession, saving now would allow the state to spend from its Rainy Day Fund later to soften the magnitude and length of any necessary cuts,” according to Brown’s budget explanation. 

Prop. 30 extension

It’s likely that voters will consider a 12-year extension to Prop. 30, which is a “temporary” tax on top earners and a quarter-cent sales tax increase.

It was approved during the last downturn primarily to avoid deep cuts in education. It is set to expire in two years, but proponents saw this campaign cycle as more favorable. 

The Prop. 30 extension only perpetuates the state’s over-reliance on personal income tax, said Carson Bruno, a research fellow at Stanford University’s Hoover Institution. 

“Prop. 30 doubles down on this problem by making the income taxes even more reliant on the highest earners,” Bruno said. 

Bruno agreed Prop. 30 expiring would leave a hole in the budget, but said legislators should have been preparing for this, as it was “temporary.”

“If they haven’t been doing that then that’s kind of irresponsible,” Bruno said.

15 comments

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  1. Ronald
    Ronald 10 May, 2016, 06:51

    The net out-migration of 1.2 million Californians out of the state people between 2005 and 2014, ranking 49th is the result of the “silent” majority voting with their feet in favor of states with better economic opportunities, while the “vocal” minority of our elected official continue to over regulate.

    California’s unreasonable tax system and burdensome regulatory structure continue to frustrate California businesses. Thus, unrealistic income projections from a diminishing pool of businesses and employed citizens will require even more taxes on the few left to pay them. The California financially challenged will continue to disproportionally pick up the costs “camouflaged” at businesses.

    Reply this comment
  2. Bob
    Bob 10 May, 2016, 13:22

    WHY WAS I NOT SURPRISED?: Unless I have an extremely short memory, or I’m at least partially blind, why wasn’t the term “CUTTING SPENDING” ever suggested or even mentioned in this article?

    Reply this comment
  3. Rex the Wonder Dog!
    Rex the Wonder Dog! 10 May, 2016, 14:14

    Bruno agreed Prop. 30 expiring would leave a hole in the budget, but said legislators should have been preparing for this, as it was “temporary.””
    When will they learn, there is no such thing as a “temporary tax” in Krazee KA.

    Reply this comment
    • TT is Ted Ted
      TT is Ted Ted 11 May, 2016, 09:10

      LOL Hey Poodle— Any more prediction fails lately!

      LMAO blog on little buddy!!! I’m still laughing!!!!!!!!!!!!

      Reply this comment
  4. milton
    milton 10 May, 2016, 14:19

    Mark Leno looks like a child molester. Is there a reason for that? Is he auditioning for a movie?

    Reply this comment
  5. Spurwing Plover
    Spurwing Plover 11 May, 2016, 07:42

    All those illegal aliens are putting a strain on Moonbeam and Newsom’s little agenda

    Reply this comment
  6. Ulysses Uhaul
    Ulysses Uhaul 11 May, 2016, 10:08

    Teddy

    The Poodle has lost his crude edge…..intellectual competition with the fair and balanced taking a toll on the poor lad….Saw and Neth just rip him a good one with haphazard lame retorts, so so sad…you have been so so easy going on him lately probably sensing Poodle is in alarming emotional decline….caring and nice of you-

    Reply this comment
  7. ricky65
    ricky65 11 May, 2016, 14:16

    With such a goofy tax structure just one little hiccup in the California economy and revenues will crash.
    The tech stocks like Apple are trending down lately which could mean a recession on the way. It that happens, it means a depression to Cali because of its dependence mostly on the taxes of few billionaire and millionaire tech oligarchs.
    And….did anybody notice that the controller’s report last month indicated state revenues fell $1 billion last month? Not good news for the Gimmecrat big spenders.

    Reply this comment
  8. Donkey
    Donkey 13 May, 2016, 06:38

    Our state is over a trillion dollars in debt, and the RAGWUS feeders could care less! 🙂

    Reply this comment
  9. Ulysses Uhaul
    Ulysses Uhaul 13 May, 2016, 09:36

    Ragwus are not your problem….the peoblem is poly pants and white tennies CWD posters hugging their coffee shop discount chits wile telling the average resident how to live their lives….

    Reply this comment
  10. Donkey
    Donkey 13 May, 2016, 17:47

    Ahaul. as usual your perspective is skewed by that fat public pension bong you are drawing from the Quid Pro Quo game the RAGWUS invented. You have no moral compass. Your Obama has the average American private sector working losing thousands a year in pay while you laugh at their plight. It will be nice watching the millennials hunting you thieves down. 🙂

    Reply this comment
  11. Ulysses Uhaul
    Ulysses Uhaul 13 May, 2016, 20:29

    You sound like demented Desi, the North Carolina runaway…..he didn’t use our Pack and Ship premier services….

    He just left probably using one of those globalist van lines…..sob!

    Business is brisk…..doomers really getting cleaned out by Obammycare and mini-wages in their failing, exploitive service businesses.

    Reply this comment
  12. Steel Boy
    Steel Boy 14 May, 2016, 11:00

    A trillion in debt????

    Rush says it’s 100 trillion in debt? Who is a girl to believe????

    Reply this comment
  13. Bunker Queen
    Bunker Queen 16 May, 2016, 11:06

    Hi Tardsly!

    Reply this comment

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