Taxable Talk

October is usually a good month for California collections (of taxes). After all, it’s the extension deadline and many residents send more money to Sacramento. This month, though, revenues were $810 million below budget; the deficit year to date is somewhere between $1.5 billion and $1.7 billion.

That deficit is just for four months. Projected for a full year, that’s a nearly $5 billion budget deficit.

As I’ve mentioned in the past, the solution is to make California a more business friendly state so that businesses have a reason to be in the Bronze Golden State. Instead, it’s state employees who get raises while the people are threatened by the Governor with higher taxes.

My budget ideas would have no chance of passing in Sacramento, but are simple and to the point:

1. End redundant state agencies.
2. Cut unnecessary state agencies.
3. End public employee unions.
4. Eliminate defined benefit pensions for state employees.
5. Have a two-year term of the Legislature where the legislature is required to cut 20% of state regulations and or laws.
6. Cut state tax rates by 5%. (I am not stating that California’s top income tax bracket should be reduced from 9.3% to 4.3%; rather, that it should be reduced by 5%: From 9.3% to 8.85%.)

I’ve written about the redundant and unnecessary state agencies in the past. I’ll be posting on the other ideas in the next couple of weeks.

California needs to face reality: The state is broke. Radical change is necessary. It won’t be pretty to many but the state can’t continue to spend money it doesn’t have.

September revenue in California came in at a bit more than $300 million under forecast. That brings the fiscal year to somewhere between $700 and $800 million below forecast. (The California Controller’s office and the California Finance Department use slightly different numbers, so the exact shortfall number varies between the departments.)

No matter, if we take $700 million for three months and project that out for twelve months, you get $2.8 billion under forecast. As the Bloomberg article I linked to notes, automatics spending cuts in California are almost certain to happen.

The problems the Bronze Golden State face can be summed up simply in that the state hasn’t found a regulation that they don’t like and a tax they don’t want. Add in a recession nationally (no matter if the pundits haven’t officially called it a recession, the public is acting as if it is a recession) and neither businesses nor individuals want to spend money or do anything else that increases California collections.

California should, of course, cut regulations and make the state more business friendly. Unfortunately, that has as much chance as it snowing in Irvine today.

A good juxtaposition with this is that Governor Jerry Brown signed the so-called “Dream Act” into law. This law will consider illegal immigrants in California state residents and allow them to enter California state colleges and universities and pay resident rates (which are less than non-resident rates). That will, of course, increase the costs to the universities and increase the state’s deficit.

Just over one week ago, I wrote that California tax collections in August exceeded the budget. It turns out that California Controller John Chiang apparently had $75 million of insurance tax in August that was actually received in September. Thus, California revenues were under projections in August by $65 million.

Well, California is only $596 million under budget. What else could California do to help its cause? (My next post will deal with that.)

California revenues slightly surpassed budgeted amounts in August. Revenues were ahead of plan by $134.9 million. For the 2011-2012 fiscal year, revenues remain $403.8 million below estimates.

The good news, though is just slight. The budget counted on $4 billion of revenues that would magically appear. The chance of that happening is slight. Far more likely will be a revenue shortfall when the year is over.

Still, California politicians and state bureaucrats will take any good news. Now, if they could only use alchemy to make money….

I’m shocked, just shocked to find out that the Bronze Golden State is already falling behind on collections.

That was sarcasm, of course.

In June, California collections were $350 million below the budgeted amount. In July, they were $539 million less. That’s a total of $889 million in two months. If we extrapolate that out for an entire year, we get a $5.3 billion shortfall. Back when the budget passed I said,

And there’s a projected $4 billion increase in revenues…inserted because California had $1.2 billion in higher tax collections than projected in April. Finally, there’s the usual accounting gimmicks (moving certain payments to the following fiscal year) that will result in $1 billion of “savings”.

Surprise, surprise: $5 billion in shortfall with a budget containing $5 billion of imaginary revenue.

Unfortunately for Californians, there’s nothing to drive an increase in state revenues. As I wrote last month,

The problem for California is, there really is no driver for continued revenue growth. The new Amazon Tax will lead to less revenues in future months (it won’t be a huge loss, but it will be a loss) rather than the $200 Million increase that was written into the budget. Unemployment is increasing, and California businesses continue to face regulatory hell. I’m not seeing any improvement in the national economy.

California policymakers are hoping, of course, that I’m wrong. But for business to expand there must be reasons to do so. The administration in Washington is giving no one a reason to expand. Sacramento is following suit. Unless something drastic changes, California is looking at another year of malaise.

What the state legislature should do is obvious. Unfortunately, what they will do is also obvious: nothing.

Here in the Bronze Golden State, the state income numbers for June have just come in. Collections came in better than forecast by $440.5 Million. That seems good, but it’s not quite good enough to meet California’s budget. That budget projected that revenues would exceed the projection by $790.5 Million, so California’s golden revenues in June now look like pyrite.

The problem for California is, there really is no driver for continued revenue growth. The new Amazon Tax will lead to less revenues in future months (it won’t be a huge loss, but it will be a loss) rather than the $200 Million increase that was written into the budget. Unemployment is increasing, and California businesses continue to face regulatory hell. I’m not seeing any improvement in the national economy.

California policymakers are hoping, of course, that I’m wrong. But for business to expand there must be reasons to do so. The administration in Washington is giving no one a reason to expand. Sacramento is following suit. Unless something drastic changes, California is looking at another year of malaise.

Jerry Brown faced one reality yesterday: The votes aren’t there for extension of the temporary tax increases passed two years ago. However, he and Democratic leaders of the California legislature will be passing a budget today that will on paper close a $10 billion deficit.

Thee are $4 billion of spending cuts (some will be challenged in court). There are some fee and tax increases (some of which will likely be challenged in court) to raise another $1 billion. And there’s a projected $4 billion increase in revenues…inserted because California had $1.2 billion in higher tax collections than projected in April. Finally, there’s the usual accounting gimmicks (moving certain payments to the following fiscal year) that will result in $1 billion of “savings”.

The budget includes the Amazon tax, forcing online retailers to collect California sales tax. Amazon vows that they will immediately drop all California affiliates, so that they will not have a physical presence in the state and, thus, will not have to collect California taxes.

If one is objective about the budget, it’s quite clear that this budget will leave about a $5 billion deficit for the new fiscal year…and that’s only if the economy doesn’t get worse. I’m not seeing many signs of an economic recovery.

California Controller John Chiang announced today that the budget proposed by the Democrats was not balanced and that therefore he would stop paying the legislature until a balanced budget is voted on. Mr. Chiang stated, “The numbers simply did not add up.” He said the budget had $1.86 billion more in spending than in revenues.

As you can imagine, Democrats in the legislature are livid. Democrats accused him of grandstanding and playing for a higher office. There are rumors of a lawsuit (I’m sure that would go over really well with Californians).

Frankly, Democrats should realize that the budget they proposed was yet another smoke and mirrors budget. Mr. Chiang included revenues in the proposed budget that were likely unconstitutional (he assumed all of the revenues would occur). The true budget deficit was significantly greater than $1.86 billion — probably $5 billion or more.

So will Democrats finally agree to stop kicking the can down the road, or will there be yet another episode of As the Budget Churns? Being a cynic, I’m voting for the soap opera to continue. Expect a lawsuit to be filed, and nothing to happen for more weeks. The losers, of course, are California taxpayers.

In the latest episode of As the Budget Churns, last night Democrats in the California legislature passed a budget but received no Republican votes for it. The budget that passed was typical for the last few years: Full of gimmicks and borrowing, in theory it closed a $10 billion deficit; however, it really didn’t.

Democratic Governor Jerry Brown promised he would veto such a budget. He did so today.

Republicans in the legislature want pension reform; Democrats are beholden to union interests and don’t want pension reform. As usual, the unstoppable force is meeting the immovable object with the normal result: Nothing happens.

There are some new wrinkles. Proposition 25, passed last November by voters, stated that the legislature would have its pay docked if they didn’t pass a budget by June 15th. Well, they passed a budget…but one that might have been unconstitutional (and it was vetoed, too). We’ll have to see if pay is docked but I’m betting it won’t be.

Assuming that’s the case, there’s no pressure on Democrats…until California starts issuing registered warrants (IOUs). That might happen in July.

So don’t forget to tune in next week for yet another exciting episode of As the Budget Churns!