Analyst Urges Legislators Think Hard on Brown's Tax Plans

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Legislative Analyst Mac Taylor calls Governor Brown's assumptions about tax revenues "a little bit optimistic." But how much is too much? (Photo: KQED/John Myers)

Governor Jerry Brown's quest to have voters approve a multi-million dollar tax increase is key to his plan for balancing the state's books. But might the uncertainty of winning that election force deep spending cuts now by officials who will decide to, instead, assume the worst?

That scenario is one that lawmakers at state Capitol should consider carefully, urges the Legislature's independent budget analyst.

"The Legislature faces a very difficult situation" in how to budget given the political uncertainty over taxes, Legislative Analyst Mac Taylor said in a midday news conference to discuss his office's new report.

So, too, do the biggest benefactors of state revenues: schools. The LAO report reaffirms what our education reporter Ana Tintocalis found for her Monday radio story: school districts are already assuming the worst.

That reaction is no doubt in large part due to their 2011 experience with the budget's 'trigger cut' mechanism and the inclusion of yet another one of these automatic cuts -- a bigger one -- in 2012 should the November 6 ballot measure to raise taxes fail.

And on the tax measure is also a source of disagreement. On Monday, the LAO analysis of Brown's income and sales tax initiative came in at $2 billion less than what the governor's number crunchers have estimated.

The new report only adds to the dispute, with the LAO believing Brown's overall revenues are too optimistic in the current 2011-12 fiscal year, the budget year beginning July 1, and even in future years.

Legislative Analyst Taylor said all of that big picture disagreement hinges on a very small part of California's population: high income earners. The LAO revenue models project, in their words, "significantly less" personal income taxes from the wealthy -- most notably in the 2012 tax year.

"We're just not sure how they (the Brown administration) get to their numbers," Taylor told reporters.

The analyst pointed out that the state budget's growing reliance on personal income taxes, which now account for more than 60% of budget dollars. So, too, is the much discussed reliance on the fortunes of the state's most wealthy -- literally, the top 1% of taxpayers.

The LAO report points out that Governor Brown's new budget projects 2012 capital gains by California taxpayers to be a whopping $34 billion higher than the LAO's own analysis from November. That translates into a $3 billion disagreement in personal income tax revenues.

"In order to get the kinds of [revenue] gains the administration is forecasting," said Taylor, "it kind of looks like you need pretty good improvement in capital markets and housing markets." And he said neither seems to be in the tea leaves.

Which gets us back to the budgeting choices that legislators need to make in the coming weeks and months, and the political context in which those choices will be made.

As we learned last week, legislative Democrats are either skeptical or outright opposed to enacting spending cuts by early March, preferring instead to wait for April tax receipts to give a more accurate look at the cash available. On the one hand, the LAO report seems to affirm the 'wait and see' strategy, in that it casts doubt on the governor's estimates.

But on the other hand, it also may fuel Republican legislators' calls for an even more prudent budget, one that doesn't hinge on a major tax increase being ratified by voters this fall.

"It will simply result in yet another boom and bust cycle, which caused our current budget crisis," said newly elected Senate GOP leader Bob Huff in a statement on the governor's tax initiative and the concerns raised in the LAO report.

Meantime, a different political question comes to mind. Suppose that the governor's campaign to raise taxes extols the virtue of those taxes as protecting schools (as it no doubt must)... but at the same time schools begin cutting their budgets for a worst-case scenario of the taxes being defeated. How does that dissonance play out in the minds of the public?

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About John Myers

John Myers is senior editor of KQED's new multimedia California Politics & Government Desk.  He has covered California politics for most of the past two decades -- serving previously as Sacramento bureau chief for KQED News and, most recently, as political editor for KXTV News10 (ABC) in Sacramento. He moderated the only gubernatorial debate of 2014, and was named one of the nation's top statehouse reporters by The Washington Post. Follow him on Twitter @johnmyers.
  • Ash Roughani

    One might be justified in saying that forecasting revenue in California is more of an art than a science.  But even calling it an art is a stretch.  Because we choose to rely more on income than consumption taxation, we have to live with the reality of an unpredictable revenue roller coaster.

    Take, for example, the likelihood of a Facebook IPO.  Here’s the analyst’s take:

    “In the coming months, the state’s revenue forecasts will need to be adjusted somewhat to account for the possibility of hundreds of millions of dollars of additional revenues related to the Facebook IPO. These revenues could affect the budgetary outlook beginning in 2012–13. We caution that it will be impossible to forecast IPO–related state revenues with any precision, and it is likely that little information about the state revenue gain from the Facebook IPO will be available before investors file tax returns in April 2013.”

    Exactly.  And because of our myopic fiscal decision-making, we overcommit in good years and wonder why we have to cut so much in bad years.

    We either need much greater fiscal discipline or broader tax base with lower overall rates.  That’s the honest tradeoff Californians need to face.