Slow­ing econ­omy could hit state bud­get

The Fresno Bee (Sunday) - - Opinion - BY DAN WAL­TERS CALmatters Com­men­tary CALmatters is a public-in­ter­est jour­nal­ism ven­ture com­mit­ted to ex­plain­ing how Cal­i­for­nia's state Capi­tol works and why it mat­ters. For more sto­ries by Dan Wal­ters, go to /com­men­tary.

Gov. Gavin New­som’s first bud­get pro­posal, un­veiled two months ago, took a sur­pris­ingly con­ser­va­tive ap­proach, given his prom­ises of high-dol­lar spend­ing dur­ing his cam­paign for the gov­er­nor­ship.

While he pro­posed to­ken ap­pro­pri­a­tions to ex­pand health in­sur­ance for the poor and pre-kinder­garten care and ed­u­ca­tion, his 2019-20 bud­get would de­vote most of the state’s hefty sur­pluses to re­serves, one-time ex­pen­di­tures and pay­ing down debt.

It was, in brief, just the sort of cau­tious bud­get that out­go­ing Gov. Jerry Brown would have pre­sented, along with his an­nual warn­ing that re­ces­sion may be just around the cor­ner.

New­som said his goal was “a struc­turally bal­anced bud­get over the next four years.” But the bud­get’s own eco­nomic fore­cast sees “slow­ing growth” and warns that “risks are rising.”

In the weeks since New­som re­leased his bud­get, we’ve seen sev­eral in­di­ca­tions that Cal­i­for­nia’s econ­omy, which has been boom­ing for the bet­ter part of a decade and gen­er­at­ing many bil­lions of ex­tra dol­lars in state rev­enue, may, in fact, be slow­ing.

There’s been a marked slow­down in the state’s once-red-hot hous­ing mar­ket, for ex­am­ple, and while un­em­ploy­ment re­mains at his­toric low lev­els — just 4.2 per­cent in Jan­uary — job cre­ation also seems to be slow­ing, in part be­cause em­ploy­ers are hav­ing dif­fi­culty find­ing enough qual­i­fied work­ers.

As it so­licited bids for a new bond is­sue re­cently, the trea­surer’s of­fice listed 12 “eco­nomic and bud­get risks” fac­ing the state, in­clud­ing a “threat of re­ces­sion,” un­cer­tain in­ter­na­tional trade poli­cies and the bud­get’s ever-in­creas­ing re­liance on in­come taxes from a hand­ful of wealthy Cal­i­for­ni­ans and their in­vest­ment earn­ings.

When Brown be­gan his sec­ond stint as gov­er­nor in 2011, per­sonal in­come taxes pro­vided 53 per­cent of the state’s gen­eral-fund rev­enue. But as New­som suc­ceeds Brown, in­come taxes ac­count for 71 per­cent. And half of them are paid by just 1 per­cent of the state’s tax­pay­ers, thanks not only to over­all eco­nomic gains but also to higher tax rates on the wealthy, which Brown cham­pi­oned.

The pro­por­tion of taxes com­ing from cap­i­tal gains — a ma­jor in­come source for the one-per­centers — has dou­bled from 4.8 per­cent to 9.7 per­cent.

De­spite his ad­vo­cacy for those tax in­creases, Brown re­peat­edly warned that re­ly­ing so much on high­in­come tax­pay­ers cre­ates higher lev­els of rev­enue volatil­ity that bite hard dur­ing eco­nomic down­turns.

Dur­ing the Great Re­ces­sion, Cal­i­for­nia saw its gen­eral-fund rev­enue drop by about 20 per­cent, with most of that de­cline stem­ming from re­duc­tions in tax­able in­come among the state’s wealth­i­est res­i­dents.

Is Cal­i­for­nia be­gin­ning to feel that bite again?

State Con­troller Betty Yee re­ported this month that two-thirds through the 2018-19 fis­cal year, rev­enue is run­ning sev­eral bil­lion dol­lars un­der as­sump­tions be­cause of lower-than-ex­pected in­come-tax pay­ments.

It could re­flect a slow­ing econ­omy, a sharp drop in the stock mar­ket late last year and/or high­in­come tax­pay­ers ad­just­ing to changes in fed­eral tax law, par­tic­u­larly a $10,000 limit on de­duc­tions for state and lo­cal taxes.

The lat­ter is an in­cen­tive for those with in­come flex­i­bil­ity, such as the abil­ity to de­fer cap­i­tal gains, to min­i­mize their state tax ex­po­sure.

All of these in­di­ca­tors could be just tem­po­rary blips or the har­bin­ger of a down­ward trend that could un­der­mine New­som’s hopes of hav­ing a bal­anced bud­get through­out his first term.

Tellingly, the Leg­is­la­ture’s bud­get of­fice ad­vises law­mak­ers in a re­cent bud­get over­view that “build­ing more re­serves than pro­posed by the gov­er­nor would be pru­dent.”

How­ever, New­som’s fel­low Democrats in the Leg­is­la­ture would like to save less and spend more, par­tic­u­larly on ex­pen­sive en­ti­tle­ments such as health care and early child­hood ed­u­ca­tion.

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