CalMatters
It is truly amazing – and not in a good way – that California’s politicians cannot grasp a phenomenon that has plagued state finances for years, known as “volatility.”
It’s this: The state budget is extraordinarily dependent on personal income tax revenues, most of which comes from a relative handful of upper-income taxpayers whose incomes vary year to year because much of it comes from investments.
When the affluent make lots of money, the state treasury overflows with revenue, but when the economy falters, incomes and tax revenues fall. Unfortunately, because politicians have short attention spans, they tend to increase spending when revenues surge, only to face deficits when they inevitably decline.
The syndrome’s peaks and valleys have become more severe because dependence on the wealthy has increased, economic cycles have become more acute and windfalls tend to be spent on services that are politically difficult to adjust, such as public schools, health care and aid to the state’s poor families.
Actually, California politicians do grasp volatility. That was demonstrated 11 months ago when Gov. Gavin Newsom proposed a 2023-24 budget that addressed what he said was a $22.5 billion deficit just eight months after he had boasted of a $97.5 billion surplus.
“No other state in American history has ever experienced a surplus as large as this,” Newsom had bragged in May 2022, thus encouraging his fellow Democrats in the Legislature to sharply increase spending.
When Newsom acknowledged the looming deficit last January, he blamed revenue volatility, displaying a chart showing big swings in income taxes on capital gains and saying it “sums up California’s tax structure, sums up boom and bust.”
Gabe Petek, the Legislature’s budget analyst, revealed last week that accumulated deficits for the 2022-23, 2023-24 and the forthcoming 2024-25 fiscal years, based on spending commitments already made and current and projected revenue, are $68 billion.
“Largely as a result of a severe revenue decline in 2022‑23, the state faces a serious budget deficit,” Petek told the Legislature. “Specifically, under the state’s current law and policy, we estimate the Legislature will need to solve a budget problem of $68 billion in the coming budget process.”
Moreover, Petek’s office projects deficits in the neighborhood of $30 billion a year for the remainder of Newsom’s governorship.
So it’s not that Newsom and legislators don’t know about the corrosive effects of volatility – it’s that they, like their predecessors, are unwilling to do what’s necessary to counteract it: overhaul the revenue system.
When volatility first became a major problem during the Great Recession, then-Gov. Arnold Schwarzenegger and legislative leaders created a commission to suggest remedies. Chaired by businessman Gerald Parsky, the commission held months of hearings and finally, on a divided vote, recommended the state reduce its dependence on income taxes and shift to a revised form of sales tax.
The report was buried as soon as it reached the Legislature. When Jerry Brown returned to the governorship in 2011, he persuaded voters to create a “rainy day fund” that would absorb some revenues during boom times and cushion the impact of future downturns.
The fund now has about $24 billion and a separate school reserve has $8.1 billion. At best, reserves would cover less than half of the $68 billion deficit and none of the $90 billion in projected deficits for the three following years.
It’s certainly better to have those reserves than not, but they are incomplete responses to volatility and that a judicious, even gradual, overhaul of the tax system is still the best solution, as politically difficult as that may be for a Legislature dominated by left-leaning Democrats.
Procrastination will only make the problem worse.
CalMatters is a public interest journalism venture committed to explaining how California’s state Capitol works and why it matters. For more stories by Dan Walters, go to Commentary.
The views and opinions expressed in Op-Ed articles are those of the author. [Do you have an opinion on something local? Share it with us at info@edhat.com.]
Congratulations to Edhat for FINALLY telling it like it is, by a great “man on the street “ journalist like Dan Walters.
Yes, it’s all true. The Democratic Party has led us into a fiscal disaster. Our elected officials are like pigs eating from the trough. They have blown OUR money on propping up failed policies and managed to chase away THOUSANDS of tax paying businesses. That’s right, plenty of rewarding BAD behavior, allowing criminals to take over our inner cities, buying off unions and allowing environmentalists to cause havoc to our power grid, driving up the cost of EVERYTHING!
When you have a State that has been a One-Party-State for over 20 years, there is no longer any checks and balances… It’s no longer a “Democratic System”.
The Sacramento Democrats have run California into the ground with spending and writing “feel good” legislation that does nothing but cause flourishing business and industry to LEAVE the State- That means everything from taxable incomes down to retail taxes disappear…
Just look at how communities are forced to BUILD housing, despite the fact that the local infrastructure(s) can not handle this Sacramento mandate… This is effects every municipality in the State.
We, as a State are increasing our low income population (subsidized poplulation) and our prosperous, business successful – those that pay a majority of the taxes and have the purchase powers, are leaving….
Newsom should be impeached along with all his staff
For what? Be specific. It must be an impeachable offense.
“along with all his staff” LOL! Dude, you can’t “impeach” employees. Have you ever voted? When was the last time you saw Chief of Staff or Personal Assistant on the ballot? Gads, there’s truly no end to the cavernous vacuum, is there?
Sac you missed the entire well-made point and just went nitpicking. That’s on you.
BASIC – Is that your medical opinion? In the realm of literacy, when someone says someone should be impeached and another asks, “For what? Be specific[,]” it is anything BUT missing the point. In fact, it is considered to be DIRECTLY challenging the point. Sure, the whole “staff” thing was ribbing, but that was just a bonus.
And a “well-made point?” LOL! You act as though Stoner is a wordsmith or something. He simply said a few words (without punctuation) to make a simple (and illogical – re “staff”) statement. Hardly a thoughtful and crafted claim.
Your overexaggerating, hyperbole and feigned outrage is on you.
See all the other posts beside yours here Sac. That’s where a lot of us stand.
You mean the other TWO? Dude, when you see a drop of water, you must panic, thinking it’s raining. He’s on the overexaggerating a tad, pal.
Also, I was asking STONER, not the others, why Newsom should “be impeached.” Look, I know you have trouble with the whole reply concept, but as you can see, I did it correctly and replied to SBSTONER, not the others. I don’t give a rat’s about the other comments, I was talking to one person.
And cool. Glad you found your buddies and you all stand together.
LOL seriously man, I can’t even take you slightly seriously anymore.