California’s Budget Goes Off the Cliff

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Contributed by Chriss Street, Newport Beach, CA.

California State Controller John Chiang just announced that total State revenue for the month of November 2012 fell $806.8 million, or 10.8%, below budget.  Democrats thought they could hammer “the rich” by convincing voters to pass Proposition 30 to create the highest state income tax in the nation.  But it now appears that high income earners have already “voted-with-their-feet” by moving themselves and their businesses out of state, resulting in over $1 billion shortfall in corporate and income taxes last month and the beginning of a new financial crisis.

Passage of Proposition 30 set off euphoria and expectations of higher spending for public employees.  The California Teachers’ Association (CTA) trumpeted:

“California students and working families won a clear victory today as voters clearly demonstrated their willingness to invest in our public schools and colleges and also rejected a deceptive ballot measure aimed at silencing educators, other workers and their unions.” 

State bureaucrats immediately ramped up deficit spending far beyond $6 billion annual tax increase, with the Departments of Health Services and Developmental Services increasing this month’s spending by over a $1 billion versus last year.  The lower tax collection and higher spending drove the State’s deficit after the tax increase to $2.7 billion for the first 5 months of this fiscal year.  State Controller John Chaing reported:

“November’s disappointing revenues stand in stark contrast to recent news that California is leading the nation in job growth, has significantly improved its cash liquidity to pay bills, and even long-distressed home values are starting to inch upward,” said Chiang. “This serves as a sobering reminder that, while the economy is expanding, it is doing so at a slow and uneven pace that will require the State to exercise care and discipline in how its fiscal affairs are managed in the coming year.”

The improved “cash liquidity” Chaing referred to, turns out to be $24.9 billion of debt!

During the election campaign, Governor Jerry Brown and his pro-tax coalition had the California Board of Equalization request a report from the Stanford Center on Poverty and Inequality, which claimed to have looked at state tax records and found no risk of the super-rich leaving.  Based on their access to California state income tax records from 1992 to 2009, the researchers concluded that millionaire migration is a myth by anti-tax advocates and “other factors, such as personal and business contacts, seem to weigh more heavily in deciding where to live.

The study’s authors, Stanford’s Cristobal Young, an assistant professor of sociology, and Princeton’s Charles Varner, a doctoral candidate in sociology, expounded that the temporary nature of high earnings may help explain why the additional taxes didn’t cause a noticeable flight of millionaires.  Top income tax payers seem to fall into and out of the millionaire income bracket as their income rises and falls across the million-dollar mark from year to year.

Personal connections weigh more heavily than tax rates in deciding where to live and “people are tied to states for different reasons,” Young said.  “They don’t want to take their kids out of school; they want to stay connected with friends, with families … with business contacts.  People crowd together, from Silicon Valley to New York City, because of the returns associated with collaboration.”  The findings dispel the “market metaphor,” in which states advertise low tax rates in a competition to woo high-income individuals. “This is a poor representation of how people decide where to live.”

Young added that looking at the tax flight issue only scratches the surface of state financial woes. “People need to think about the depth of California’s budget problems,” he said.  “I think there’s much, much bigger things to worry about than this issue of tax flight because it’s really hard to find any evidence of it” … “I hope people hear, listen to and absorb what the evidence says on this issue,” Young said.

Following the tax increase victory, Reuters News Service published: “Super-rich flight from California? Not so fast” to reassurance there would be very little risk that wealthy Californians would depart for income tax free Nevada, Washington and Texas.  Although “some Silicon Valley business owners had expressed interest in a move after California’s top rate was raised by 29% to 13.3%, “business groups from the Beverly Hills Chamber of Commerce to the tech industry policy group TechNet backed the tax, and the state Chamber of Commerce took no position.”

As panic is spreading that goosing taxes on the rich may have created enough “tax flight” that the California will actually collect less taxes, there was welcome news that a business had committed to opening in the State.   Executives of the 99 Cents Only Stores Inc. proclaimed they would be opening a new location in Beverly Hills on formerly posh Rodeo Drive. Cross Posted from Chriss Street’s blog.

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  6 comments for “California’s Budget Goes Off the Cliff

  1. Economics Considered
    December 10, 2012 at 12:08 pm

    This is an incredibly ignorant piece. The numbers stated are grossly misrepresented. I invite anyone who has any ability for critical analysis to follow the reference links.

    The revenue shortfall of $802,369 is for FIVE months, not one month. As such, it represents a 2.8% shortfall from expectations (problem enough, indeed).

    The $24.9B of debt is a correct figure. HOWEVER, the perspective is truly ignorant. As you might think, on reflection, revenues are certainly uneven across a fiscal year (California FY is from July 1 thru June 30). As such, much of the tax revenue falls in the 3rd and 4th quarters (Jan 1 thru June 30). Since expenditures are relatively constant, at this juncture of 5 months into the fiscal year, there is a large gap between expenditures and income based on timing. Perspective would be to examine where the borrowing total stood in the previous fiscal year. It stood at $13.28B. This fiscal year, the loan balance stands at $15.288. So the operating degradation is $2.0B of loan balance (again, bad enough). This is a FAR cry from the implication that somehow or another California has all of a sudden taken on an unexpected $24.98B of additional debt.

    Last Fiscal year, California had an FY operating deficit of $1.429B. Making a VERY ROUGH extrapolation, if conditions do not get worse (or better) one could extrapolate that by next June 30, California would have an FY2012-13 deficit of $6.5B (again, bad enough – actually VERY bad). Which would send their operational loan balance at FY end from $9.6B at the beginning of this FY to over $15B next June. Certainly a daunting prospect.

    I am seriously disappointed in Chris Street. Ah well.

  2. mlm
    December 12, 2012 at 2:33 pm

    I wonder why the tax increase proponents had the study performed by socioligists and not tax experts?

  3. Colorado Economist
    December 12, 2012 at 4:01 pm

    There are a great many reasons why California is has slid into oblivion. Not the least of which is their tax code. I left because I was in downtown LA the day of the Rodney King riots. There was no way my family would be subjected to that again. Great weather and beaches are useless if your family is widowed and orphaned by street mobs for sport and Live-At-Five entertainment. I recieved a tremendous additional benefit of lower taxes, regulation, and a more libertarian environment.

    California not only lost my personal and investment tax income but those of my family (the kids are all grown up and productive members of society now too). Net flow of productive people is not to California but away. California lost 798,000 tax returns, 2.3 million people, totaling $51 Billion in taxable income between 1993-2010 according to (http://interactive.taxfoundation.org/migration/).

    http://interactive.taxfoundation.org/migration/graph.php

    Any way you slice it, that's gotta hurt!

    Sincerely,
    Colorado Economist

  4. Rik
    December 13, 2012 at 12:20 am

    @cq
    If I would have to make a guess probably because the real decisionmaker also has a sociology or pretty similar background and thinks that other subjects are easy to handle when you have studied that pinnacle of human knowledge and civilisation: sociology. Especially if you have no practical experience with it and have done the 50 hour course at college.
    You see it as well with economists that use normal logic to solve a legal issue (or lawyers doing it the other way around, forbidden so cannot happen and things like that).

  5. Arry
    December 13, 2012 at 6:22 am

    "some Silicon Valley business owners had expressed interest in a move after California’s top rate was raised by 29% to 13.3%"

    Really so the richest people in California had -15.7% as their tax rate? No wonder the state is in debt. In Australia we have top tax rate of over 60%!

  6. J Man
    December 16, 2012 at 7:16 am

    Little mMrty O'Malley, Gov of Maryland, tried a millionaire tax just a couple of years ago and got HOSED. Millionaires moved out of state or reaaranged their fiances.

    Why do LIberals always think raising taxes is the answer, when every time taxs are raised the state gets LESS money……

Comments are closed.