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California Gov. Jerry Brown discusses pension reform during a news conference in Los Angeles. The state's revenue outlook deteriorated slightly in November.
The tax revenue outlook for California has been improving. But Moody’s, the big credit rating agency, reported Friday that the take for November was lower than expected.
The agency wasted no time is raising a red flag about the sudden reversal of a positive revenue trend. November came in 11 percent lower than the state’s budget called for.
Emily Raimes, a Moody’s analyst with whom we've talked before at the DeBord Report, pointed out that the shortfall highlights the volatility of California’s tax revenues — a point I've been droning on about for months now. In the state, we're overly dependent on the incomes of the rich to make the budget work.
This is something that Raimes says Moody’s “sees in states with high wealth.” The same issue arises in New York and New Jersey.
"California’s progressive income tax structure fuels the volatility; the wealthiest 15% of state taxpayers pay approximately 80% of all state taxes, according to the state’s audited financial reports," she wrote in a contribution to Moody's Weekly Credit Outlook.
Raimes doesn’t expect this to change. She says that, given the size and vibrancy of California’s economy, it should be rated higher. But she doesn't expect to state to underperform the rest of the country during the recovery. Rather, the Golden State will keep pace. And she sees the passage of Prop 30 as a good thing — although raising taxes on upper-income earners will only exacerbate the structural problem of already repying too much on their wealth. UCLA economist Jerry Nickelsburg also recently pointed this out, calling Prop 30 a "double-edged sword."
As it stands, California has the second lowest Moody's rating for general obligation bonds (A1, with a stable outlook). Only Illinois is worse (A2) is worse.