Governor’s Office Blog, 11/1/08

by David Crane

All across the country, states are facing declining budget revenues due to the mortgage crisis and troubled markets.

Yet California is uniquely burdened because of our volatile revenue system.

The state of Washington, for example, expects a revenue shortfall of less than 1 percent.

California may face a 10 percent shortfall.

The difference is that our tax revenues reflect Wall Street’s economy more than California’s economy.

As Governor Schwarzenegger says, our economy is one of the strongest and most diverse in the world.

But our revenue system is another matter. California’s budget revenues swing from extreme to extreme, boom or bust, more than any other state.

This is because more than 50 percent of our state’s personal income tax revenues come from just 1 percent of taxpayers.

And that 1 percent gets a substantial amount of its income from Wall Street investment gains.

When the stock market is surging, revenues flood into our coffers.

When it slows, California’s budget suffers, even if our economy is still growing.

During the last economic slowdown in 2001, the economy in California grew 1.1 percent

but tax revenues fell 17 percent.

On the flip side, when the economy grew 8.7 percent in 1999, tax revenues rose twice as fast.

Simply put, our revenue system is too volatile and too detached from our economy.

This is no way to fund schools, healthcare and other programs that need stability. It doesn’t have to be this way.

That’s why this week, the Governor joined Assembly Speaker Karen Bass and signed an executive order creating a bipartisan Commission on the 21st Century Economy.

The Commission will study our tax code and recommend ways to make our state’s revenue system look more like California and less like Wall Street.

Along with our new Rainy Day Fund, this will help smooth out our revenues.

Deficits won’t disappear, but future problems will be much more manageable.

The Governor has already announced a Special Session of the Legislature to work on our immediate budget deficit.

And this Commission will help California achieve fiscal stability in future years.

It’s time for California to have a tax system that matches its needs and mirrors its economy.