A half-decade ago, as California’s economy was being hammered by a severe recession and the state budget was awash in red ink, then-Gov. Arnold Schwarzenegger and legislators created a blue-ribbon commission to study revenue “volatility” and recommend ways to offset it.
The state had experienced wild swings of revenue for years, and its politicians, including Schwarzenegger, had compounded their effects by overspending periodic windfalls, only to see serious deficits when revenues later declined.
Creation of the “Commission on the 21st Century Economy” was an implicit admission that politicians, on their own, were incapable of curbing that irresponsible tendency.
However, the commission, headed by wealthy businessman Gerald Parsky, divided into two camps.
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One, headed by Parsky, advocated changes in the tax system to reduce volatility – reducing the very high proportion of taxes paid by a few wealthy Californians whose incomes were especially volatile, and placing more load onto middle-income taxpayers.
The other, more liberal faction said that such tax changes would be unfair to the nonwealthy. It advocated, instead, mitigating the effects of volatility, if not volatility itself, by diverting windfalls into reserves that could then be tapped to avoid deficits when revenues dropped.
The Parsky faction’s remedy prevailed in the final report, but it was immediately filed away and forgotten.
The state continued to deal with deficits until Gov. Jerry Brown persuaded voters to close them by raising sales taxes a little bit and income taxes on the wealthy by a lot – thus increasing the likelihood of more severe volatility if, and when, the economy once again dips.
So if California isn’t going to reform its tax system, as rejection of the Parsky commission report and the subsequent income tax hike imply, will it heed the advice of the commission’s minority about reserves?
California appears to be on the verge of another major surge in revenues, partially from the 2012 hike and partially from an improving economy. Legislative Analyst Mac Taylor sees an annual surplus approaching $6 billion by the end of the 2014-15 fiscal year and nearly $10 billion by 2017-18, barring another downturn. Brown’s bean-counters aren’t disagreeing.
Taylor says it’s an opportunity to create “a strong reserve” to cushion the impacts of future downturns, as well as pay off debts that were run up during the deficit years and close shortfalls in pension and retiree health care obligations. Brown implies that he wants to pursue a cautious course as well.
However, there’s mounting pressure from advocates of health, welfare and education programs to use the surpluses, and Brown’s final decisions on a 2014-15 budget proposal this month will set the stage for another chapter in a very old saga.