PD Editorial: State’s big surplus must be used wisely

Christmas came early for California's new crop of state elected officials.

The state is flush heading into the next fiscal year, they learned last week. “It is difficult to overstate how good the budget's condition is today,” according to a report issued by the state's nonpartisan legislative analyst.

Gov.-elect Gavin Newsom and the state Legislature have a projected $30 billion - that's billion with a “b” - cushion.

That's a surplus larger than the entire annual budget of 26 other states.

By law, half of that money goes into the state's rainy day reserve. Newsom and lawmakers could spend the rest on new and expanded public services, the analyst said, or they could squirrel it away as a further hedge against a future economic downturn.

Outgoing Gov. Jerry Brown, who inherited a $27 billion deficit when he returned to Sacramento in 2011, established the rainy day fund and spent much of the past eight years warning lawmakers that another recession is somewhere on the horizon.

If post-World War II patterns are a guide, a recession is overdue.

When it arrives, the state's boom could quickly become a bust.

The health of California's budget is heavily reliant on taxes paid by a relatively small number of wealthy residents in the top income-tax bracket; the top 1 percent account for about 45 percent of state income tax revenue. When they prosper, the state prospers. When they flounder, the state goes in the tank.

They're doing quite well right now, thank you very much, so the legislative analyst is projecting almost $101 billion in income tax receipts for the upcoming fiscal year, an increase of about 10 percent over 2017-18.

Sales taxes, the next largest source of state revenue, are projected at $26.8 billion for 2019-20.

During a recession, people pinch pennies. That's obvious. But this might not be: taxable income for the wealthy is more dependent on capital gains than wages. And they plummet during a recession, just as more people qualify for safety-net programs.

After the dot-com bust in 1999, for example, capital gains revenue fell almost 80 percent, turning a $10 billion state surplus into a $12 billion deficit. In 2007, when the housing bubble burst, capital gains revenue dropped 80 percent, and again the state faced record deficits.

Since 2009, the final year of the Great Recession, capital gains collections have increased almost eightfold, allowing Brown to leave Newsom an 11-figure surplus.

Brown deserves a lot of credit for exercising fiscal discipline during his third and fourth terms as governor. But he missed a golden opportunity to modernize an outdated tax system that puts the state treasury on a Wall Street roller-coaster.

There have been numerous proposals, many of them from Brown's fellow Democrats. Most of them follow the same approach: flattening the income tax and broadening the sales tax by extending it services, such as legal fees or car repairs, and potentially lowering the rate.

Newsom didn't say much about tax reform during his campaign either. He has, in his own words, “big, hairy audacious goals,” including universal preschool and reducing homelessness. He also takes office, as we noted Saturday, in the midst of a housing crisis that cannot be ignored.

But he cannot follow Brown's lead in ignoring tax reform. The budget surplus is a gift that could disappear with a sustained reversal in the stock market. The time to prepare is now.

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