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Economy is revving up; why is Jerry Brown seeking cuts, tax hikes?

Published: Saturday, Jan. 7, 2012 - 12:00 am | Page 1A
Last Modified: Monday, Jan. 9, 2012 - 11:47 am

The economy is kicking into gear – yet Gov. Jerry Brown says California still has to slash spending and raise taxes.

What gives?

The jarring contrast between Brown's budget proposal and the latest unemployment news out of Washington is a reflection of the depth of the downturn in California. Even as job growth is gaining significant momentum – nationally and in California – most experts don't expect an immediate end to multibillion-dollar state budget deficits.

"At the state level, revenues are going up. But the gap, the red ink at the state level, is so huge," said Sung Won Sohn, an economist at California State University's Channel Islands campus in Camarillo. "There's still a significant amount of red ink to cover."

On Friday, the U.S. Bureau of Labor Statistics said employers across the country added a better-than-expected 200,000 jobs in December. The national unemployment rate fell to 8.5 percent, the lowest since February 2009.

Just a day earlier in Sacramento, the governor offered up the sort of grim menu that's become the norm at the Capitol in recent years: billions of dollars' worth of spending cuts and higher taxes.

If the Legislature won't raise taxes, Brown warned of billions of additional spending cuts.

Brown's plan acknowledges that things are getting better. The deficit is estimated at $9.2 billion, or about one-third what it was a year ago. The outlooks for the national and state economies are "guardedly positive," according to his official forecast.

But the Democratic governor said the economy isn't growing quickly enough to rescue the state budget.

In one telling statistic, his forecasters at the Department of Finance said it will be 2016 before California recoups the 1.2 million jobs it lost during the recession.

That's seven years after the recession technically ended in June 2009. Typically, full recovery in the job market takes no more than 4 1/2 years, the forecasters said.

The result will be continued modest revenue growth. Assuming Brown gets his $6.9 billion tax increase, revenue would increase by less than 8 percent in the upcoming fiscal year, he predicted.

At least one expert said Brown is underestimating the strength of the recovery. Revenue could grow another $4 billion or so, said Los Angeles consultant Chris Thornberg, an adviser to state Controller John Chiang.

Thornberg said Brown's forecast is "bizarrely low" and ignores the economic progress the state is making.

In the past year, California has added 233,000 jobs. That's a growth rate of 1.7 percent, which is higher than the U.S. average.

The state's unemployment rate has fallen to 11.3 percent, down more than a full percentage point in the past year.

Thornberg said the state is in a "bifurcated recovery," in which the coast is performing far better than inland counties. That will start to even out, he said.

"The strength of the coastal areas will start spilling over into the Central Valley soon enough," he said.

Even with a healthy economic recovery, the state is still dogged by structural budget problems, Thornberg said. Those are the legacy of increased spending under former Gov. Gray Davis during the dot-com boom, he said.

Slumping property values also continue to put downward pressure on tax collections even as the economy brightens.

"A big part of the California story is the real estate market," said Michael Shires, a budget expert at Pepperdine University. "That's where local governments and the state government get their money."

Another issue is the stock market. Although the Dow Jones average went up 15 percent last year, and Silicon Valley is doing very well, the state has yet to see the big gusher of capital gains tax payments as it did in the dot-com boom. "Capital gains (payments) have not been crazy," Shires said.

That could begin to change this year as the tech economy continues to improve. For instance, Facebook Inc. is expected to make its long-anticipated initial public stock offering sometime this spring or early summer, the Wall Street Journal has reported.

Facebook's IPO could generate tens of millions of dollars in tax revenue, although much of it wouldn't show up in Sacramento until 2013.

Forecasting tax revenue remains very tricky. Last June, the Legislature passed a budget that assumed $4 billion in additional tax revenue. Thornberg called lawmakers "out of their minds."

As it turned out, the state missed the mark by $2.2 billion, triggering a fresh round of budget cuts announced last month.

© Copyright The Sacramento Bee. All rights reserved.

Read more articles by Dale Kasler



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