State budget hinges on earnings of the 1 percent | Tim Talk | Tim Hunt | |

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By Tim Hunt

State budget hinges on earnings of the 1 percent

Uploaded: Dec 6, 2016

A majority of the state’s voters easily approved continuation of the temporary income tax surcharge on the rich that Gov. Brown convinced voters to approve in 2012 as California was struggling to dig out of its huge budget hole.
The irony of the passage is that it continues the state’s vulnerability to major budget hiccups if the wealthiest residents have a bad year financially.
The Sacramento Bee reported that the passage of Proposition 55, backed heavily by the state teachers’ union and other public employee labor groups could make the fiscal situation more fragile. The measure extends the “temporary” taxes that were set to expire in 2018 to 2030—in effect making them permanent.
About one-third of the state’s revenue comes from just 1.5 percent of the taxpayers, according to the Legislative Analyst’s Office. The budget this year is $122 billion so you can see the challenge.
Estimates on what the income tax surcharge will generate range from $4 billion to $9 billion annually. That’s a fair spread, but the overall situation almost guarantees a boom-and-bust cycle when the economy turns south. Gov. Brown, throughout this year, has cautioned about spending because the current expansion (as anemic as it has been across much of the country) technically has run since President Obama’s first year in office (89 months)
The governor warns that expansions do not last forever—there is a business cycle.
There is some good news in this—the rainy day fund that voters established at the governor’s request two years ago now has about $8 billion in it. The governor convinced the Legislature to put more money away that the statute required this year.
The post-election fiscal update by the Legislative Analyst’s Office projects the budget will remain in the black for the next four years, but echoes the governor’s concern about “considerable uncertainty” about the economy.
Mix in a new Republican administration that has pledged to repeal and replace Obama care and to take a hard look at tax cuts and the outlook is foggy. The report intentionally did not address those possibilities.
The LOA report did note that the state was prepared to weather a mild recession, according to the Bee.
Revenues have fallen short of projections, coming up $706 below estimates on June 30. Four months into the new fiscal year, revenue is off $595 million.

Voters passed the ban on plastic grocery bags this month. The East Bay Times ran a graphic that showed the communities where the bag ban will be new. Check these out: Hillsborough, Woodside, Los Altos Hills, Monte Sereno, Saratoga, Scotts Valley and Gilroy. Except for the latter two, it’s difficult to find more affluent small towns in the Bay Area.