All across the country, states are facing declining revenues as a result of our troubled economy. Yet, California is uniquely burdened because our revenues swing from extreme to extreme – boom or bust – more than other states. For example, the state of Washington is projecting a revenue shortfall of less than 1%, while our state may face a shortfall of nearly 10%. The difference is that our state’s tax revenues reflect Wall Street’s economy more than California’s economy.
This is because more than 50% of California’s personal income tax revenues come from the just 1% of taxpayers (fewer than 150,000 taxpayers), and that 1% of taxpayers gets a substantial amount of their taxable income from Wall Street investment gains. When there are big investment gains, California’s budget picks up revenue. When there are no investment gains, California’s budget suffers even if California’s economy is still growing.
For example, during the last economic slowdown in 2001, the economy in California grew 1.1% but tax revenues fell 17%. On the other side of the coin, when the economy grew 8.7% in 1999, tax revenues rose twice as fast. Simply put, our tax revenues are too decoupled from our economy and too volatile for our state.
This is no way to fund schools, healthcare and corrections. Those programs need stable and predictable revenue. Unfortunately, however, Wall Street’s recent decline will lower our estimate of how much capital gains tax revenue California will bring in this year. We’d already lowered that estimate by 30% and we’re going to need to lower it again. Revenue for this current year’s budget is going to be impacted significantly.
It doesn’t have to be this way. Our recently passed budget reform will help smooth volatility by forcing excess revenues into a rainy day fund, but the Governor has long called for a commission to address the core problem of unstable revenues, and did so again this past Monday when he announced that he is calling the Legislators into a special session on November 5th to revise the budget based on the new revenue projections. Today, he will make it official and sign an Executive Order that creates a bipartisan Commission on the 21st Century Economy that will propose an alternative revenue model that is more stable and reflective of our underlying economy. It’s time for California to have a tax system that matches its needs and mirrors its economy.