Memo re: Relationship between California’s Deficit and Tax Structure, 6/5/09

Governor Arnold Schwarzenegger’s Special Advisor for Jobs and Economic Growth David Crane issued the following memo today on the challenges of California’s tax structure, which, despite the fact that the state’s economy grew in 2008 according to two recent reports, has left California with one of the worst budget deficits in the nation:


TO: Concerned Parties
FROM: David Crane, Special Advisor for Jobs and Economic Growth, Office of Governor Schwarzenegger
DATED: June 5, 2009
RE: California’s Tax Structure

Bureau of Economic Analysis’ economic growth report (pdf)
Federal Reserve Bank of Philadelphia’s index of state economic performance (pdf)

The federal report from the Bureau of Economic Analysis (BEA) details state-by-state economic growth in 2008.  There you can see that, despite being at the epicenter of the housing crisis, California’s highly diverse economy still grew in 2008.  Note also that the numbers there are ‘real’ growth numbers (i.e., after inflation adjustments).

The second report is from the Federal Reserve Bank of Philadelphia, which compiles an index of state economic performance.  There you can see that, under that measure and through February 2009, California was the 16th best performing state economy in the country.

Of course, government budget revenues are another matter.  Because California’s tax system reflects Wall Street’s economy more than California’s economy, our budget revenues are down dramatically.  This is why the Governor and Legislature await with great anticipation the recommendations to be released this summer from the Tax Modernization Commission they formed last December. A tax system that looks more like California’s economy will be much more stable than the current system.