Taxable Talk

Last week I reported that California's legislative analyst believed that the Bronze Golden State was looking at a $10 billion deficit. State Senator Tom McClintock (R-Thousand Oaks) thinks that's wrong. Unfortunately, he thinks California is looking at a $20 billion deficit. Ouch.

Senator McClintock notes that the legislative analyst deducted the $4 billion reserve when computing the $10 billion deficit number so we're really looking at a $14 billion deficit assuming the assumptions in the budget are correct.

The problem is that the budget assumes the status quo—that California's revenues continue in 2007 like they did in 2006. That's an unreasonable assumption. Senator McClintock put it well:

"Revenue growth last year was only 2.3 percent; the LAO admits that the economy will deteriorate in the fourth quarter of the fiscal year; and most ominously, our revenue receipts in the first four months of this fiscal year grew only 0.6 percent compared to the first four months of last year, according to the latest data from the state controller’s office. Even the Department of Finance reports only 1.7 percent growth through October 31st. If revenues continue to come within this range, the deficit will be in the $18 to $20 billion range by June."

"A billion here, a billion there, and pretty soon you're talking about real money."—Senator Everett McKinley Dirksen

And that's the situation in the Bronze Golden State. The Legislative Analyst released her report, and the news is grim. California is looking at a $1.9 billion shortfall for the current fiscal year, and an $8 billion shortfall for 2008-2009. That's about $10 billion, and that's quite a bit more than a billion here and a billion there.

Of course, conditions could change. Perhaps the real estate market will have a miraculous comeback in the next few weeks. Perhaps consumers will overspend during the holiday season, leading to increased tax revenues. Perhaps there will be a federal capital gains tax cut, leading to increased state tax revenues. Perhaps there will be more stock options exercised in Silicon Valley than anyone expects. Perhaps the Cubs will win the World Series....

I think you get the idea. If anything, I think the LAO is too conservative about the shortfall. She discounts the possibility of a recession. I think there's a real possibility of one caused by the housing crisis and energy costs.

In any case, California's legislators will find themselves between a rock and a hard place soon. They are mandated to have a balanced budget. As the systemic deficit grows, they will be forced to make real reforms: either increasing revenues (taxes) or cutting programs. There aren't the votes to increase taxes. There haven't been the votes to cut programs. Soon, there may not be a choice.