“The general fund amount is $122.6 billion, up by 6 percent over this year. Other special funds and spending outside the Legislature’s direct control bring the expected total to $170.7 billion,” the San Francisco Chronicle noted. “The rocket fuel behind these sums is the state’s volatile capital gains tax, paid by the wealthy in good times. It’s a feast or famine levy that rides with economic swings and right now it’s coining money for Sacramento.”

Fire from both sides

But while Brown’s budget upped the ante on public schools, basic entitlements and the Golden State’s rainy-day fund, his unyielding insistence on guarding against the economic worst left his party’s liberal ambitions unfulfilled once again. “Advocates for the poor cheered the governor’s proposed increases to cash aid for the aged, blind and disabled — the first time such grants would go up in 10 years,” as the Los Angeles Times reported, but “anti-poverty advocates said they were disappointed that there was no proposed increase to CalWorks, which provides cash payments to the working poor.” Senate President Pro Tem Kevin de León, D-Los Angeles, praised Brown for “historic investments in our children’s education that will make a tremendous difference,” according to the Sacramento Bee. But he complained that “we still have to take a closer look at strengthening our health care system for the poor and developmentally disabled that has been starved for far too long.”

That could be the watchword for Sacramento this week, as leading Democrats in the Assembly and the Senate labored on a spending plan that could survive the governor’s scrutiny.

Equipped with a line-item veto, which allows him to knock out provisions after they’re passed without scrapping a budget in its entirety, Gov. Jerry Brown has once again taken a more cautious stance on spending than his colleagues in the state Legislature, with far less allocated for state-subsidized child care, Medi-Cal and welfare recipients.

But many Republicans agreed once again that Brown’s circumspection didn’t go far enough.

Although profligate Democrats have been frustrated before, Brown’s political position has become unshakable. As he has headed into his fourth term, he has maintained a high public approval within his party — despite growing anxiety over the drought — to stave off a rebellion on spending. Democrats haven’t unified enough to override Brown with a two-thirds vote, Bloomberg Politics noted.

Dueling projections

Democrats have pushed to hike California’s budget even higher than the $115.3 billion Brown offered in his revised plan last month — a sum which “was already $7.3 billion larger than the budget enacted in June for the current fiscal year,” according to the Los Angeles Daily News. “And it reflected a $6.7 billion increase in projected general-fund revenues compared to the proposal he released in January.”

Democrats blamed overly cautious revenue estimates for Brown’s unwillingness to loosen the purse strings. “As in previous years, the disagreement revolves around the question of how much money is available for spending,” the Los Angeles Times observed. “The lawmakers’ budget plans are built with numbers from nonpartisan legislative analysts, whose revenue estimates are higher than the Brown administration’s. Even though revenue has routinely outpaced the governor’s expectations, Brown has continued to insist on the lower figures.”

That brought a swift rebuke from Brown’s camp. “H.D. Palmer, spokesman for Brown’s Department of Finance, confirmed that the governor has not reached a deal on spending with lawmakers,” the Times reported. “The Legislature is aware of our concerns with their higher revenue numbers, which is built on the most volatile revenue source there is, which is capital gains,” he told the Times.

Republican resistance

Over the past decade, income taxes have risen and fallen by the billions, as California has experienced unexpected twists and turns, including the global financial crisis and the latest Silicon Valley boom. In a recent speech, Gov. Brown argued against the kind of social psychology that could exacerbate the impact of adverse events. “The longer you’re away from a recession, the less you remember it and all you see is money coming in,” he said. “Usually at the point when the recession is right around the corner and people are feeling the best ever and they want to just spend, we crash.”

But Republicans cautioned that Brown’s tilt toward thrift did not go far enough. Former Assemblyman Chuck DeVore, R-Irvine — now vice president for policy at the Texas Public Policy Foundation — warned that the Golden State’s financial position couldn’t withstand another downturn. “California’s heavy reliance on a highly progressive income tax, with the nation’s highest top marginal rate at 13.3 percent, makes the state subject to massive swings in revenue as wealthy taxpayers realize capital gains or receive bonuses or stock options,” he wrote. “The challenge is in tempering budget growth in the face of historically wild swings in the state’s income tax revenue.”

Republicans faced their own challenge, however, centered around how else to structure California’s tax code. As the Los Angeles Times editorial board conceded, the state’s highest-in-the-nation income tax rate discouraged economic growth. “But reformers face a problem too,” it concluded: “Any move to stabilize revenue by de-emphasizing income taxes would appear to shift the burden from the wealthy onto everyone else. In a blue state acutely sensitive to income inequality, that’s a non-starter.”

A 2012 Bloomberg News analysis headlined “The Facebook Effect” laid out the picture:

“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 Park, California-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.”

'I can’t imagine foreign buyers trusting American products'

This reliance on capital gains could haunt the Brown administration and the Legislature in short order if the NSA scandal keeps damaging the reputation of Facebook and other California industry giants like Google, Yahoo and Twitter. A Tuesday report on Forbes.com has some context:

“Princeton technologist Ed Felten — who used to be government-employed at the Federal Trade Commission — writes, 'This is going to put U.S. companies at a competitive disadvantage, because people will believe that U.S. companies lack the ability to protect their customers—and people will suspect that U.S. companies may feel compelled to lie to their customers about security.'

“'I can’t imagine foreign buyers trusting American products,” says security expert Bruce Schneier. 'We have to assume companies have been co-opted, wittingly or unwittingly. If you were a company in Sweden, are you really going to want to buy American products?'

“Earlier this summer, technology analyst Daniel Castro authored a report suggesting that revelations about corporate cooperation with the government through programs like PRISM would take a toll on cloud computing businesses to the tune of $22 to $35 billion over the next three years 'if foreign customers decide the risks of storing data with a U.S. company outweigh the benefits.'”

This backlash is well under way. Facebook, Google and Yahoo are begging the Obama administration to be allowed to reveal the extent of their cooperation with the NSA. Whether or not the White House agrees, the corporate titans are sending a message to the world that things aren't as bad as they may seem. Are they telling the truth? Who knows?

But they know what the perception is. It's why Google is also taking other decisive steps to address its image problem. This is from the weekend Washington Post:

“Google is racing to encrypt the torrents of information that flow among its data centers around the world in a bid to thwart snooping by the NSA and the intelligence agencies of foreign governments, company officials said Friday.

“The move by Google is among the most concrete signs yet that recent revelations about the National Security Agency’s sweeping surveillance efforts have provoked significant backlash within an American technology industry that U.S. government officials long courted as a potential partner in spying programs.”

Jerry Brown and state lawmakers better wish Google good luck, and Yahoo and Facebook, too. Otherwise, the fallout from the largest spying scandal in world history could buffet state budgets for decades to come.

Maybe this will finally end the inexplicably blithe reaction most Californians have to the fact that their government is spying illegally on millions of Americans with the coerced assistance of the Golden State's tech giants.