Risky revenues cloud state’s budget plans

Gov. Brown’s latest budget reflects California’s risky, roller-coaster reliance on uncertain revenues generated by wealthy taxpayers. And there’s no immediate end in sight, given that the governor wants voters’ permission to raise those taxes further in November.

That assessment from the Legislature’s nonpartisan fiscal adviser is at the heart of its analysis of the governor’s draft budget for the 2012-13 fiscal year which he hastily unveiled last week amid a staff mix-up. The year begins July 1.

“Already, California’s budget is dependent on volatile income tax payments by the state’s wealthiest individuals,” the Legislative Analyst noted. “The top 1 percent of PIT (personal income tax) filers pay around 40 percent of state income taxes, the General Fund’s dominant funding source.”

The $90 billion General Fund is the state’s coffer of income, sales, business and insurance taxes and the principal financing mechanism for state services. Perhaps half of the General Fund money goes to public education.

“Because the governor’s budget proposal is centered on his idea for these wealthy tax filers to pay more, the state would become more dependent on this uncertain revenue source,” the LAO noted. “For this reason, revenue estimates are an even bigger question mark than usual for the Legislature this year.”

The bottom line is that “differing fortunes for upper–income taxpayers can quickly create or eliminate billions of dollars of projected state revenues. If our current revenue estimates are closer to the target than the administration’s, the Legislature will have to pursue billions of dollars more in budget–balancing solutions,” the LAO said.

Not everyone agrees.

“There are two issues: One’s the impact on the budget the other’s the impact on the economy. It’s much better to tax the wealthy because it’s deductible from your federal payments, it keeps money that would otherwise be going to the feds in California,” said Lenny Goldberg of the California Tax Reform Association, a labor-financed group that advocates for tax equity, including closure of corporate tax loopholes.

Meanwhile, Brown’s tax proposal – which the governor is aiming at the November ballot – may bring in billions less than anticipated according to recent projections by the LAO.
Brown’s plan, calling for a half-cent increase in sales tax joined with increased taxes on high-income earners, originally hoped for $6.9 billion in increased average annual revenue over the next five years.

However the LAO projects that Brown’s proposal would create about $5.5 billion on average, with only $4.8 billion for the 2012-13 fiscal year.

While estimates from both the LAO and Department of Finance agree on the expected funds generated from sales tax, the money that would come from the tax on top earners is harder to pin down.

Because the personal income tax from the upper bracket tends to come from capital gains rather than wages, predicting how much will be reported is highly unpredictable as demonstrated by historic swings in revenue.

The LAO’s analysis gives the example of the current mental health tax levied on people making over $1 million, which “generated $734 million in 2009-10 but has raised as much as $1.6 billion in previous years.”

As the “cornerstone” of the governor’s recently released budget proposal, if Brown’s measure passes and the LAO’s estimates turn out to be closer to home than the administration’s rosier projections, the Legislature may have to scramble to put together the billions needed to balance the budget.

 But Goldberg contended the LAO’s estimates may be overly pessimistic and the concern with the volatility of personal income tax revenues misplaced.

“Everyone’s working from the same Franchise Tax Board numbers, and the numbers I’ve seen are far more consistent with the Department of Finance than with the LAO,” said Goldberg, noting that given the presumed recovery the economy is experiencing, the wealthy are generally the first to do better.

Goldberg also notes that Brown’s budget addresses the issue of volatility by attempting to reign in expenditures, adding,

“The volatility issue really has to do with the expenditure side,” he added, “if you really think you have volatile revenue coming in don’t spend it all.”