KPCC's business analyst Mark Lacter talks about what's in California's new budget.
Steve Julian: On Tuesdays we talk about the latest business stories with Mark Lacter. Mark, California's new budget was on-time, but contains cuts, not revenues. What does this tell us about California?
Mark Lacter: It tells us that generating new revenues in Sacramento is extremely difficult, which is kind of a big deal when you're trying to close a $25 billion deficit. Gov. Jerry Brown wasn’t able to extend a bunch of tax increases that expired on July 1, so they came up with this alternative budget plan that relies mostly on spending cuts and also on the assumption that the state will somehow receive $4 billion more in tax revenue than they had projected just a couple of months ago. Maybe it'll happen, but basing a budget on hope instead of reality gives you an idea of how desperate they were in closing that deficit.
Julian: And not extending those taxes complicates the state's finances, doesn't it?
Lacter: Certainly does – you might not have noticed the California sales tax being lowered a percentage point to seven-and-a-quarter percent, but it'll result in the loss of several billion dollars in tax revenue. Now, there are those who argue that lower taxes will encourage more spending, and in some limited cases, such as buying a car, that might be true. But that extras spending will not offset the amount of tax money that will be lost - and of course now that the tax has been lowered, it's going to be much tougher to convince voters that it should be raised again. And speaking of the sales tax, voters won't be crazy about having to pay taxes for online purchases from out-of-state retailers, what's being called the Amazon tax.
Julian: The legislature is requiring Amazon and others to collect that tax.
Lacter: That’s right, California retailers have been fighting for such a law, which could bring in a few hundred million dollars a year in additional tax revenue – not bad considering all the shortfalls. Of course, Amazon is expected to challenge the legislation, as it has in other states that have passed similar measures. So it could be many months before the courts figure out the law's legality - more potential tax money in limbo.
Julian: But aren't there lots of really wealthy people in California, the land of sun and money clips?
Lacter: That seems to be the one foolproof way for the state to generate revenue: rich people. Roughly a quarter of the money that's used to operate the state is coming from the personal income tax of Californians earning more than $300,000.
Julian: More than a quarter?
Lacter: Yes. When times are good for these people, the state tax money comes in. When times are not so good, as was the case during the recession, the money dries up. The state hasn't always been this reliant on the personal income tax (actually it was the sales tax that used to be the biggest source of revenue), and there have been some efforts over the years to overhaul the state finances so that California isn't so reliant on the very wealthy, but the efforts have gone nowhere.
Julian: So is the money spigot on or off?
Lacter: Seems to be back on. The recent public offering for LinkedIn, based up in the Silicon Valley, has made a bunch of people with stock in that company really rich - and now there are plans for an initial public offering for the online gaming company Zygna, and one of these days - perhaps early next year - the granddaddy of them all will be ready to go public: Facebook. All told, you're looking at many billions of dollars being made from these three offerings alone, and the state of California is going to see some of that action. There’s actually some concern about the possibility of yet another tech bubble, which eventually might lead to yet another bust, which would lead to shortfall in tax revenue. But for the moment I doubt you'll be hearing too many complaints about where the money is coming from. As long as it’s coming.
Julian: Mark Lacter is a contributing writer for Los Angeles Magazine and writes the business blog at LA Observed.com.