Why the Downgrade and Market Volatility Are Especially Bad for California
By Jens Erik Gould / Los Angeles Wednesday, Aug. 10, 2011
California Gov. Jerry Brown signs the state budget, June 30, 2011 at the state Capitol in Sacramento, California.
Hector Amezcua / Sacramento Bee / MCT
It sounded great in June. California leaders had finally found a solution to the budget crisis without resorting to the usual loopholes that only temporarily cover up the problem. Or had they? Less than two months later, it looks as though they actually did go for the short-term fix, only in a different form — thanks to stock market volatility.
Under the threat of losing their paychecks if they delivered a tardy budget, lawmakers were under the gun and came up with a quick solution that factored in an expected $4 billion in additional windfall revenue from an improving economy. Fast forward to August: amid the nation's first ever credit downgrade, the stock market has had its worst week since the depths of the Great Recession. That additional windfall isn't looking so hot. The additional problem: the legislators' solution declared that if the revenue failed to materialize, the budget had built-in "triggers" that would make additional cuts of around $2.5 billion. (California Miracle: An On-Time Budget!)
"They're so far off the mark there's not a chance in hell they're going to come up with the money they thought they were going to come up with," says Christopher Thornburg of Beacon Economics, an economic research and consulting firm in California. "That was a pie-in-the-sky forecast before everything happened over the past couple days. So now it's gone from pie-in-the-sky forecast to utterly impossible."
Read more ..... Budget Crisis, Revenue Shortfalls Could "Trigger" Billions More in Curs Budget Crisis, Revenue Shortfalls Could "Trigger" Billions More in Curs
The plunge on Wall Street is especially bad for California revenue because the Golden State relies more than most states on capital gains taxes on profits made through stock market investments. That's because a relatively high percentage of the state's taxpayers are wealthy individuals, who tend to invest more. California lalso draws more on personal income taxes because it relies less on property taxes and has a narrower sales tax base than, say, Texas, according to Thornburg.
State Controller John Chiang didn't lighten the mood at all yesterday when he announced that in July — before the stock market mess even began — the state's tax revenue was $539 million, or 10.3%, lower than projected in the budget. The outlook doesn't look good for coming months either, judging by the Federal Reserve's statements on Tuesday. The Fed said growth nationwide has been "considerably slower" than expected so far this year as consumer spending was flat, the housing sector was depressed and the unemployment rate increased. (California vs. the Gerrymander: Why Republicans Are Quaking)
Read more: http://www.time.com/time/nation/article/0,8599,2087877,00.html#ixzz1Urry5KHM
