The state’s revenue system is, as we should all know by now, increasingly dependent on taxes from a relative handful of high-income Californians.
When they generate big returns on investments, state revenue soars, and when capital markets slow, revenue plunges.
The Capitol tends to spend like the proverbial drunken sailor when money pours in and then suffers intense hangovers.
The most infamous example happened in 2000. As a high-tech bubble burst and techies cashed in their stock options, the state saw a one-time, $12 billion windfall.
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“I intend to resist the siren song of permanent spending whether it comes from the left or the right,” then-Gov. Gray Davis told reporters. “And I will stand up to anyone who tries to convince the Legislature that they should spend most or all of this money in ongoing expenses.”
It was a hollow pledge. He and legislators soon squandered most of the windfall on permanent new spending and tax cuts and the next state budget drowned in red ink.
Davis’ fiscal malpractice was one reason he was recalled by voters. But successor Arnold Schwarzenegger did the same thing six years later when the state had another spike in revenue, followed by more than a half-decade of severe deficits.
“We have to learn from history and not keep repeating our mistakes,” Gov. Jerry Brown said Thursday as he unveiled a revised 2015-16 budget. “While there are few signs of immediate contraction, another recession is on the way,” he told the Legislature. “We just don’t know when.”
California is in another revenue upcycle. Investments of the wealthy are booming and a temporary income tax hike is magnifying the effect.
Brown’s new budget assumes the state will have $6.7 billion more than the January version and he’s happy to have all but a bit of the extra money committed, via the state constitution, to boosting state school aid, debt repayment and his new rainy-day fund.
While he includes a minimal earned-income tax credit for some of the state’s poorest residents, his new budget largely ignores loud demands from advocates for the poor and legislators for increasing other anti-poverty spending, such as subsidized child care.
“I don’t want to get caught in the jaws of the persistent fiscal instability of the state of California,” Brown said, perhaps thinking to himself, “like Gray.”
The token EITC may mollify some Democrats, but Senate President Kevin de León and others are not ceding the point.
“The EITC in an important anti-poverty tool but it is no substitute for a good-paying job.” de León said. “Too many women are locked out of the job market because they cannot afford quality child care.”
It’s difficult to predict how intense the conflict will be, and Brown may have to give some ground. But on the larger issue of not overspending windfalls, he’s absolutely right, as the experiences of his two predecessors prove.