Tax Windfall or Not – State Leaders should Prepare a “Rainy Day” Fund.

Loren Kaye
President of the California Foundation for Commerce and Education

California taxpayers paid $5 billion more in taxes in January than state officials anticipated. So is this an early sign of a robust economic recovery, or simply taxpayers paying in advance of when the bean-counters expected?

I lean toward the latter, since both tax changes and tax uncertainty have been far more apparent than widespread robust economic growth.

But even if this $5 billion blip is an apparition – it is also a warning. Eventually the California economy will heat up and the tax system – heavily weighted to the income tax which is heavily weighted to the rich – will produce a surplus of revenues. Even today some are warning of a new real estate bubble.

This is inevitable – nothing in the California economy, tax system or fiscal structure has changed to attenuate the boom-and-bust budget cycle. Even the Governor has made note, and insisted that this

“… is something we should not repeat. Instead, the state must live within its means, pay down debt, and build up a “rainy day” fund – all to ensure a stable government that earns the respect of the citizens that pay for it.”

A structural solution is within reach, and state leaders should be laying the groundwork for a 2014 ballot discussion about creating a rainy day reserve and preventing the Legislature from spending one-time tax windfalls on ongoing programs.

In 1978, state leaders (including Gov. Brown) blew it by taking half measures to address the property tax revolt, while squirreling away in the state budget what Treasurer Jesse Unruh called “an obscene surplus.” This time around, elected officials can get ahead of the trend by ensuring spending doesn’t ratchet up when state revenues rise and fall.

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