When California’s budget was passed I noted that it was full of smoke and mirrors. It was based on an optimistic scenario rather than a realistic scenario.
So far, it’s only off by $3 billion; the Los Angeles Times notes that, “Capitol budget analysts say preliminary data indicate the problem will probably grow to at least $10 billion.”
The crisis will be worse in California than in other states because capital gains are a high percentage of the personal income tax created. (In California, there is no preferential tax rate for capital gains.) With the stock market dropping there will likely be few capital gains to report on tax returns that are filed next year.
Governor Schwarzenegger has called a special legislative session beginning next Wednesday to deal with the crisis. Don’t expect anything other than more smoke and mirrors. Democrats want a top-to-bottom review of the state’s tax code (that means they want increased taxes) while Republicans want business tax cuts.