PD Editorial: Why California quivers when stocks dive

Hopes that U.S. stocks had finally rebounded from a brutal week faded quickly Tuesday as gains suddenly morphed into losses near the close of the market. And with that stunning downturn came increased concerns about what today will bring.

The Dow Jones Industrial Average, which at one point was up more than 200 points for the day - after suffering its eighth worst day ever the day before - dropped precipitously, ending down 205 points.

The Nasdaq composite, which was trading more than 2 percent higher for the day, dropped 19.76 points, or 0.4 percent.

If there’s an epicenter to all of this, it’s in Bejing, where investors are witnessing a spiraling of the Chinese stock market and a slowing of the nation’s economy.

China’s central bank responded on Tuesday by cutting its benchmark interest rate for the fifth time since November, and giving license to its banks to lend more money. Nevertheless, the primary Shanghai share index dropped 7.6 percent on Tuesday, reaching its lowest level in 2015.

Financial managers are quick to remind investors in times like these that market corrections are inevitable. In this case, one may even say it’s overdue, given that the nation has seen an uninterrupted bull market for six years.

According to a recent report by Deutsche Bank, it has been nearly 1,000 trading days since the market had its last correction. That’s more than double the average length of time it usually takes for such things to occur.

Nevertheless, corrections, no matter how healthy they may be, take their toll - especially in places like California.

Due to an enigmatic tax system that has long been in need of reform, California’s coffers rise and fall with capital gains. When the stock market is thriving, the state benefits from a windfall of capital gains taxes - as it has in recent months. When the market falls, capital gains suddenly become capital losses, and state revenue takes a big hit. This, in short, explains the sharp rises and falls of the state budget in recent years.

Sharp declines in the stock market also can mean more taxpayer dollars will be needed to make up for any losses in pension investments, as those retirement benefits are guaranteed. As was evident following the financial crisis of 1998, this, too, leads to fewer resources being available for other services.

Voters have approved the creation of a new rainy day fund that will help buffer against some of these reversals. But California needs better protection against these wild fluctuations between dramatic cuts in programs followed by robust surpluses.

As is said about planting a tree, the same is true about adopting tax reform in California. The best day to start is 30 years ago. The second best day is today.

Either way, the state needs the shade and protection from the kind of stock storms that continue to rage this week with no end in sight.