Lying Figures in California

Bill Leonard, who sits on the CA Board of Equalization, has a weekly newsletter in which he often comments on state budget and tax issues. His latest includes these comments on the state’s revenue estimates.

This goes even further back but remember in February the Administration and 2/3s of the Legislature said raising the sales tax would bring in billions more revenue and help balance the state budget? Since then sales tax revenue is down more than 12%. A month ago, the Administration and legislative members emerged from all night sessions to say they had successfully addressed the $26 billion structural deficit only to be told last week by Standard and Poor’s that we are still $15 billion out of balance.

Last week it was announced that the annual adjustment to the state income tax brackets has been adjusted down for deflation. When there is deflation in the overall economy those brackets go down, which is not a good result for taxpayers but it is consistent.

The Administration anticipated there would be deflation but their forecast was way above what has actually occurred. The Administration booked the extra revenues as if they were actual and that is now going to be another addition to the state’s deficit.

Department of Finance spokesman H.D. Palmer had this quote in the San Francisco Chronicle:
“We thought (deflation) would be 2.2 percent,” says H.D. Palmer, a spokesman for the state Department of Finance. Because deflation was only 1.5 percent, “There is actually going to be a marginal hit to the state’s bottom line.”

Estimating revenues in a dynamic economy with volatile taxation policies is doomed to failure. It is an argument for a substantial reserve and lots of flexibility in government spending levels because revenue estimates are generally not to be believed.

This continues a long running problem that a “balanced” budget is passed using rosy revenue projections. In theory if revenues fall short, there should be a “mid-year correction” in which spending is reduced to be in line with actual revenue. But since spending cuts are virtually anathema in Sacramento, this no longer happens. Instead more accounting shell games or more debt have become the answer.

Until real spending and debt limits are established, I see no reason to expect this to change.