The Legislative Analyst says that Governor Jerry Brown’s tax increase proposal is not going to bring in as much money as advertised. The LAO says the personal income tax increase in the initiative can’t be trusted to produce – the income tax is too volatile. Wonder what the LAO is going to say about the Munger initiative or the California Federation of Teachers/Courage Campaign proposal, both of which completely rely on income tax increases?

The governor’s Department of Finance says the governor’s measure will raise $6.9 billion a year. LAO suggests the figure is closer to $4.8 billion. The disparity of over two billion dollars reflects a difference of opinion on how much the income tax portion of the governor’s package will raise. The plan also includes a half-cent sales tax increase.

The LAO explains: “Most of the income reported by California’s upper-income filers is related in some way to their capital investments, rather than wages and salary-type income. In 2008, for example, only about 37 percent of the income reported by PIT (Personal Income Tax) filers reporting over $500,000 of income consisted of wages and salaries. The rest consisted of capital gains (generated from sales of assets, such as stocks and homes), income from these filers’ interests in partnerships and “S” corporations, dividends, interest, rent, and other capital income.

The situation makes income tax collection “highly volatile” the LAO emphasizes. The LAO notes that the top 1% of tax filers pays 40% of state income taxes.

Another reason income tax revenues may not meet expectations is because of the dynamic nature of taxes. Some bureaucrat can do a static calculation figuring that if taxes were raised a percentage point or two or five, a simple multiplication will tell how much more money will be collected.

It is not that simple.

There are consequences to raising taxes. People have been known to alter financial activities in response to tax changes.

Taxpayers could make moves to protect their income through any number of legal maneuvers. Some high-end taxpayers might even move out of California.

Or economic conditions just might depress the collection of taxes. This would not be the first time that a tax increase produced less money than expected because the tax increases slowed economic activity.

Of course, there is another side to the volatility message. Revenue could increase better than expected. The state appears to slowly be coming out of the economic doldrums and rumors of blockbuster IPO sales of Silicon Valley companies such as Facebook could change the revenue picture, although perhaps not this year.

The LAO concerns should also reflect the office’s predictions on what the Munger and CFT/Courage Campaign initiatives purport to bring in if they pass. Munger increases income taxes on all but the lower end taxpayers with a particular emphasis on dinging the top earning taxpayers. CFT raises income taxes on millionaires.