The Great Capitol Capital Gains Debate

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How much money will come from the richest Californians?

For years, we've all talked about how dependent California government is on the taxes paid by the state's most wealthy. Those dollars, often coming from their investments, can fluctuate from changes in the economy or tax policy.

But this year, the discussion in Sacramento may be almost exclusively about rich Californians -- specifically, how many of their tax dollars can lawmakers reasonably expect to collect?

The new report from the independent Legislative Analyst's Office, in a nutshell, thinks Governor Jerry Brown's budget is way too optimistic on tax revenues that the wealthy pay in capital gains.

"We can identify no strong rationale for the administration's assumption that capital gains will grow very rapidly in 2012 and later years," says the report.

In fact, the LAO analysis predicts that Brown's budget will miss the mark on state tax revenues by a net of $6.5 billion over the current and coming budget years, combined.

Historically, it's been a lot easier to sell optimism on the economy around the state Capitol than it has to sell caution. That means the lingering question from this disagreement is whether legislators will pick a more, or less, conservative target... especially after crafting a state budget last year that relied on a rosy $4 billion assumption, an assumption that fizzled and thus triggered deeper spending cuts.

Click on LAO graphic to see the tax revenue differences.

And to read the LAO report, the governor's 2012 assumptions would (could?) be even more off base without the much talked about 'Facebook Effect,' the expectation of lots of newly wealthy employees and investors of the social media giant once it goes public later this year. LAO analysts now project a $2 billion windfall from the Facebook IPO over the 2011-12 and 2012-13 fiscal years. Subtract that... and the LAO believes Governor Brown's revenue total is too optimistic to the tune $8.5 billion.

The details: in the fiscal year that ends on June 30, the new LAO forecast assumes personal income tax (PIT) revenues will come in at $51.4 billion, while Brown's January budget assumes the PIT total will be almost $54.2 billion. In the budget year beginning July 1, the LAO forecast assumes PIT totals of $55.7 billion, while Brown's January budget is built on a total of more than $59.5 billion.

It's worth remembering that this doesn't automatically mean a $6.5 billion deeper budget hole, because lower tax revenues would also mean lower guaranteed K-14 school spending via Prop 98.

The early response to the LAO report from the governor's team: let's get more data and see what's going on.

"April's personal income tax receipts will provide critical information that will guide our new revenue forecast," says Brown budget spokesman H.D. Palmer in an email.

And until tax dollars are actually collected, there's no real way to know who's right.

Economic and revenue forecasting is, as any good expert will admit, as much art as it is science. Forecasters comb through piles of historical data, employment reports, and more. (In fact, the new LAO report forced the analysts to comb through the Facebook IPO preliminary prospectus for "hints" about taxes the company and its employees will have to pay.)

As with all things under the Capitol dome, a policy debate like this gets chewed up and pushed through the political meat grinder, even more so in an election year.

And this election year could make the tax revenue debate especially ugly, because there could be as many as three proposed income tax hikes on the November ballot. Two of the three -- including Brown's own pitch -- rely on many of the same super-rich Californians to help pay for government services.

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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.

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