The Breakdown

Explaining Southern California's economy

UCLA economists say CA Prop 30 is a 'double-edged sword'

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The economists at the UCLA Anderson Forecast have been busy crunching numbers on a state and national economy.

Now they’ve taken a closer look at Prop 30, Gov. Jerry Brown’s successful ballot measure to raise income and sales taxes.

UCLA Economist Jerry Nickelsburg calls Prop 30 a “double-edged sword.” The ballot measure, which passed in November, imposes a state income tax increase on the wealthiest Californians and also raises the sales tax by a quarter of a percent.

Prop 30 was intended to avoid billions of dollars in education spending cuts. Nickelsburg predicts that it could achieve that objective, a real positive given that funding education at an appropriate level will enable the state to remain competitive in an increasingly complex global economy.

But on the downside, he said, Prop 30 doesn’t deal with how Californian keeps the money coming in long-term.

Nickelsburg say the core problem is that the state has become overly reliant on the incomes of the rich for necessary revenue. Bottom line: California depends on its wealthiest residents for 22 percent of all tax revenue, up from 10.5 percent in 1980s.

That equals a highly volatile revenue situation, especially as the state's economy becomes more entrepreneurial, according to Nickelsburg. More tech millionaires sounds awesome, but the upshot is that as their incomes fluctuate in times of boom and bust, it becomes extremely difficult for the state to figure out how much revenue it's actually going to bring in.

Prop 30 of course takes direct aim at the incomes of wealthy Californians to assist in closing the budget deficit. But if another recession hits, Prop 30 could cause tax revenues to decline even faster than usual. And that means the economic outlook is riskier for Californians — because while you only really count on two things in life, death and taxes, you can be pretty sure that recessions will regularly occur.

Follow Matthew DeBord and the DeBord Report on Twitter. And ask Matt questions at Quora.

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