Is Shakespearean Tragedy Brewing for the State Budget?

Joel Fox
Editor and Co-Publisher of Fox and Hounds Daily

Double, double, toil and trouble;

Fire burn, and cauldron bubble—The Witches of Macbeth

The state budget cauldron is boiling with forces approaching that could doom California’s bottom line.

State officials reported that income tax revenue has dropped 7% from the previous April, the biggest tax collection month. Predictions had the income tax actually increasing this April. Nearly half the income tax comes from the top 1% of income taxpayers. During good economic times, this group of high rollers usually stuffs the state treasury. In not so good times the cupboard is bare because the state relies so heavily on the taxes from their capitol gains profits.

Thrown into the cauldron is the desire of many legislative Democrats champing at the bit for more spending, cursing under the harness the governor has leashed over past budgets.

Recognizing California’s specific budget artistry, Moody’s has hauled up a warning flag that California is particularly vulnerable to a recession that is overdue. Moody’s reports that, “Historically, California has shown vulnerability as the center of the highly volatile tech industry and is reliant on personal income taxes….”

This vulnerability will be magnified if the Proposition 30 tax extension passes in November. State spending will continue to rely heavily on top income taxpayers. The campaign to pass the tax extension another dozen years already has banked $12 million. With no known opposition campaign and a strong approval rating in the last PPIC poll, the Prop 30 extension looks like it will pass.

How far will the budget drop if those high-end taxpayers are clobbered in the recession?

Double, double, toil and trouble, indeed.

What will Governor Jerry Brown do about the tax extension? He is holding his cards close, but he said the 2012 Proposition 30 was a temporary tax. He also has expressed anxiety over a recession-depleted budget. He’s tried to keep reigns on spendthrift legislators. He’s built a rainy day fund that many experts say will not be nearly enough budget protection during a mean recession.

Yet, Brown’s allies are seeking his support for the tax extension and continued reliance on the taxpayers whose contributions to the state treasury is hit the hardest during a recession.

To gain the governor’s acceptance, tax extension proponents altered the original version of the Prop 30 continuation measure to account for the rainy day fund. They argue the tax is still temporary—just 12-years longer temporary.

I’ll bet none of the proponents would sign a pledge declaring they won’t go for another extension in a dozen years. Then again most of the proponents and the governor himself won’t be involved in the budget/political games in 12 years. (Although it would not be wise to bet against Gov. Brown being around in some capacity.)

The governor has painted himself into a financial box because of other actions. He signed the minimum wage law, which his own staff said would add $4 billion to the budget when it is in full effect. If he chooses to assist either publically or even silently, the governor’s support for the tax extension proposition would move it closer to success.

So, the cauldron is boiling. The budget is stressed relying too much on the rich; no budget stress relief is in sight if the tax extension passes; economy bolstering businesses face new mandates and costs; the state budget itself is facing similar costs from actions already taken and perhaps more from actions to come.

And a recession is due.

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