{"id":8713899,"date":"2023-01-12T05:15:33","date_gmt":"2023-01-12T13:15:33","guid":{"rendered":"https:\/\/www.eastbaytimes.com\/?p=8713899&preview=true&preview_id=8713899"},"modified":"2023-01-12T05:21:50","modified_gmt":"2023-01-12T13:21:50","slug":"walters-californias-extremely-volatile-tax-system-strikes-again","status":"publish","type":"post","link":"https:\/\/www.eastbaytimes.com\/2023\/01\/12\/walters-californias-extremely-volatile-tax-system-strikes-again\/","title":{"rendered":"Walters: California’s volatile tax revenue system strikes again"},"content":{"rendered":"

As California\u2019s state budget morphs from a $97.5 billion surplus to a multi-billion-dollar deficit, it\u2019s another reminder about the volatility of the state\u2019s revenue system.<\/p>\n

Gov. Gavin Newsom\u2019s penchant for braggadocio was in full flower eight months ago when he declared that California had a $97.5 billion budget surplus and boasted that \u201cno other state in American history has ever experienced a surplus as large as this.\u201d<\/p>\n

He and the Legislature then wrote a 2022-23 budget with major increases in education, medical care and social services, plus a multi-billion-dollar cash rebate to taxpayers and other one-time expenditures.<\/p>\n

On Tuesday, a more subdued Newsom acknowledged that the projected surplus had morphed into a $22.5 billion shortfall. He proposed\u00a0a $297 billion 2023-24 budget\u00a0that throttles back some of the additional spending and indirectly borrows billions of dollars to close the gap.<\/p>\n

Moreover, Newsom warned that if the Federal Reserve System\u2019s interest rate increases trigger a recession, the deficit could become much worse.<\/p>\n

The situation is another reminder that California\u2019s public finances are at the mercy of an extremely volatile revenue system, one dominated by personal income taxes, especially those paid by high-income Californians on their stocks and other capital investments.<\/p>\n

As he began his presentation to reporters, Newsom displayed a chart demonstrating the ups and downs of capital gains as a percentage of personal income \u2013 reaching a peak of 9.7% in 2021 and now expected to decline to 5% by 2025.<\/p>\n

Newsom said it \u201csums up California\u2019s tax structure, sums up boom and bust.\u201d<\/p>\n

The decline in investment earnings, Newsom said, is the primary reason for a $29 billion reduction in projected income. His estimate of revenue declines and the resulting $22.5 deficit is a bit more optimistic than\u00a0a November forecast\u00a0from the Legislature\u2019s budget analyst, Gabe Petek.<\/p>\n

The situation rekindles a decades-old debate in political, academic and media circles about the state budget\u2019s volatile dependence on the investment earnings of a relative handful of affluent taxpayers.<\/p>\n

Former Gov. Arnold Schwarzenegger and legislative leaders created a blue-ribbon commission to recommend tax system changes that would lessen volatility. The badly divided commission proposed to reduce the reliance on the income tax by flattening it to just two brackets, eliminating sales and corporate income taxes, and creating a new \u201cnet business receipts tax.\u201d<\/p>\n

When the \u201cParsky Commission,\u201d so dubbed for its chairman, businessman Gerald Parsky, finally released its report in 2009, it was quickly consigned to oblivion. When Jerry Brown returned to the governorship in 2011, he proposed to deal with volatility by creating a \u201crainy day\u201d reserve financed by windfall revenues.<\/p>\n

That fund and other reserves now total $35.6 billion, which would easily cover the current deficit, but Newsom \u2013 agreeing with Patek \u2013 is not tapping them, citing the danger of recession.<\/p>\n

\u201cWe\u2019re not touching these reserves,\u201d he said. \u201cWe\u2019re in a very volatile moment.\u201d<\/p>\n

As hefty as the reserves appear, it\u2019s questionable whether they would be enough to counter even a moderate recession.<\/p>\n

Petek, who pegged the current shortfall at $24 billion without a recession, warned in his November forecast that \u201cBased on historical experience, should a recession occur soon, revenues could be $30\u00a0billion to $50\u00a0billion below our revenue outlook in the budget window.\u201d<\/p>\n

In other words, a recession could have as much as a $74 billion negative impact on the budget, more than twice the state\u2019s reserves. In relative terms, the state has faced deficits of that magnitude in past recessions.<\/p>\n

\u201cWhat\u2019s consistent is the inconsistency of our tax structure,\u201d Newsom acknowledged.<\/p>\n

Ideally, California would alter that structure to make it less dependent on a narrow base of taxable income \u2013 but as the fate of the Parsky Commission\u2019s report indicates, there\u2019s little political appetite for such reform.<\/p>\n

Dan Walters is a CalMatters columnist.<\/em><\/p>\n