Last year, California’s Governor Jerry Brown proclaimed an end to the state’s worrisome and persistent deficit. How did he do it? In the 2012 election he had fed voters the notion that a proposed income tax increase would be spent on education. California voters treat education as a sacred cow, even though the state ranks near the bottom in test outcomes. They passed the ballot issue.
On January 31 last year, the state’s General Fund had a deficit of $15.7 billion. The higher tax rates brought in new money. This, along with internal and external borrowing, made it look as if the deficit had gone with the wind, but it hadn’t. Brown called it a surplus, amid much cheering by the spendthrift legislature.
Fast forward to the end of January this year. The deficit had been whittled down to $12.6 billion. Some surplus!
The state’s finances are heavily dependent on personal income tax revenue. When Silicon Valley and Hollywood do well, revenue goes up. When they burp, it goes down. State Controller John Chiang, upon releasing the January figures last month, said, “While year-to-date revenues are $27.5 million ahead of estimates…the stock market’s volatility reminds us that continued revenue outperformance should not be taken for granted. Spending discipline and paying down debt must continue to be our focus.” The last part of his message fell on the deaf ears of the Democrats’ heavy majority in the legislature.
California’s economy continues to head south. The highest state corporate tax rates, sales and gasoline taxes in the country, combined with a heavy regulatory burden, continue to drive business away. Charles Schwab, the San Francisco-based stock broker, announced recently that “a significant number” of its 2,700 locally based jobs would be moved out of state. Oil giant Chevron is moving 800 jobs to Texas. Campbell Soup is closing its Sacramento plant and moving its 700 jobs to other states. Boeing is closing its big jet assembly plant in Southern California and laying off 3,000 workers. Bayer, instead of making a new drug in its Berkeley plant, is going to do it in Germany, eliminating 500 new jobs — on top of the 450 it shifted from Berkeley to Europe two years ago.
Chief Executive magazine does an annual survey of 650 corporate chief executives throughout the nation. It asks them to rate the states based upon taxation, regulation, environment, and the quality of living for workers. For 2013, California ranked 50th — dead last — for the eighth year in a row. The magazine’s survey has company. The Kauffman Foundation’s survey of 6,000 small businesses nationwide produced a grade of “F” for California, and the Tax Foundation ranked it 48th on its business taxes.
Back in 1966 Ronald Reagan defeated Jerry Brown’s father, Governor Pat Brown. During the transition period, Brown’s finance director met with Reagan’s finance team. He said, “What you need to know is we’re spending a million dollars a day more than we’re taking in. Good luck. Goodbye.”
Like most states, California’s constitution does not permit budget deficits. Brown père’s administration masked the reality of its deficit by booking expected income on the accrual method and expenditures on a cash basis. As for Brown fils, it’s much simpler. He just declares the deficit a surplus and everyone cheers.