Dan Walters

Dan Walters: Rainy-day fund not best option, but perhaps only one

Dan Walters
Dan Walters

State Controller John Chiang reported Thursday that after counting April’s income tax payments, revenue is running $2.2 billion above assumptions in the current state budget.

The windfall continues a boom-and-bust pattern that has marked state finances for decades – big increases in revenue when the economy is in an up-cycle and big drops when it fades. The swings have gotten wider because the state has become more dependent on volatile personal income taxes, especially capital gains from the state’s most affluent taxpayers.

A big chunk of the extra money will automatically be set aside for schools under a mind-numbingly complex constitutional provision.

However, Gov. Jerry Brown and the Legislature have options on the remainder: spend it on more government programs, pay down the state’s debts ($340.7 billion according to a report this week), leave it in the bank to cushion the impact of a future down-cycle, or even reduce taxes.

In years past, the tendency of the Capitol’s politicians has been to squander windfalls, then face deficits when the inevitable economic downturn comes.

However, the current political crop, from the governor down, is claiming to have learned a lesson and now wants to create a rainy-day fund to capture some windfall money.

As Chiang was reporting the newest windfall, Brown and legislative leaders were finalizing a proposal for such a fund that would go on the November ballot, replacing one that predecessor Arnold Schwarzenegger had pried from a reluctant Legislature.

It’s progress, one supposes, that politicians indirectly admit that they cannot be trusted to do the right thing when windfalls occur, and are willing to impose some restraints on themselves.

However, even if the measure is placed on the ballot and approved by voters, it cannot be airtight. The clever people in and around the Capitol have demonstrated many times that they can find ways around seemingly explicit constitutional provisions.

Indeed, the aforementioned school finance law, passed by voters in 1988, has been manipulated on numerous occasions when it interfered with what Capitol politicians wanted to do.

A better approach to revenue volatility would be to overhaul the tax system so that revenue would become more predictable, making it less dependent on income taxes from a tiny fraction of the population.

A good tax system, either sales or income, has a broad base and low rates, but California’s is just the opposite, with high rates on narrow bases. It therefore is much too sensitive to even tiny changes in the economy.

Tax reform isn’t happening for a variety of political reasons, however. Since politicians are admittedly untrustworthy when it comes to spending money, we are left with a rainy-day fund – in effect, an indirect spending cap – as the only viable option.

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