SACRAMENTO (AP) — The Legislature’s nonpartisan analyst is in agreement with Gov. Jerry Brown’s administration that personal income is going up for California’s wealthy, but they’re not sure why.
According to Legislative Analyst Mac Taylor, lawmakers have a “golden opportunity” to eliminate California’s remaining $9.6 billion deficit as a result of the rebounding economy and subsequent higher tax revenue. Taylor issued a positive overall assessment of Brown’s revised budget plan but advised lawmakers that they have a wide range of choices beyond what the governor presented to them earlier this week.
Brown’s finance team and the legislative analyst said personal income taxes are coming in much higher than other economic data would suggest. The governor proposed spending of $88.8 billion, a nearly five-percent increase over the budget he introduced in January.
The boost was fueled by an overall increase of $6.6 billion in tax receipts through July 2012, mainly from rising sales, personal income and corporate tax receipts — the three main sources of the state’s general fund.
The administration’s theory is that wages and salaries for high-income Californians grew in 2010. According to the analyst’s report, Brown’s administration assumed that tax filers who made more than $200,000 saw their wages and salaries grow by 18.3 percent in 2010. By contrast, tax filers who made less than $200,000 saw their income drop by 4.3 percent.
Taylor contends the boost is coming from capital gains – or profits from stocks, bonds and other investments. The distinction is important for the state budget because capital gains tend to fluctuate more than wages.
“It is important if we get more information as we go along as to whether it’s capital gains or if there really is this distinction by earners. It might affect the way we think about the out-years and how much more risk there may be in our revenue numbers,” Taylor told reporters Thursday. He said data will trickle out over the next two years.
The legislative analyst’s report assumed a more modest growth in wages. Taylor wrote that tax filers making more than $200,000 saw their wages grow by 4.2 percent in 2010, compared to 0.5 percent for those making less than $200,000.
Jeffrey Michael, director of the University of the Pacific’s Business Forecasting Center, said both projections are true. Santa Clara County, home of Silicon Valley high-tech jobs, saw a 10 percent year-over-year wage growth in September, according to the U.S. Department of Labor.
“I think they’re both right,” Michael said. “Which is the bigger factor? I don’t think it’s clear yet. We’ve seen strong income growth from high-income earners. Those are the jobs that are recovering and we’ve seen some strong wage growth.”
Michael cautioned that the rest of the state will take longer to heal. He said the state’s unemployment rate is projected to remain above 10 percent for the next two years.
Brown, a Democrat, released his revised budget proposal for the fiscal year that starts July1. He presented a spending plan that mixed an improved economic outlook alongside warns about the security of the state’s future if the Legislature fails to enact his plan for higher taxes.
Public schools would receive nearly $3 billion more under his plan but would be hit particularly hard if his call for tax renewals is rebuffed in the Legislature or by voters.
“We understand that our schools and local governments want a final budget so they can make plans for next year — so it’s vital to get this choice before voters without delay,” Ana Matosantos, Brown’s finance director, said in a statement Thursday.
The analyst commended Brown for using the unexpected revenue to help stave off worse cuts to schools and paying down what Brown has called California’s “wall of debt.” But Taylor questioned some of the governor’s proposals.
He echoed Democratic state Treasurer Bill Lockyer’s concern about the uncertainty of relying on voter approval of taxes. Taylor said it might prevent the state from securing short-term borrowing, which is needed to pay its bills over the summer when tax revenues typically dip. It would also create uncertainty for schools and local governments trying to set their budgets for the next fiscal
“Is there going to be an election? When would it be? What happens if there is an election and the voters turn it down,” Taylor said.
Taylor also said the governor should have kept his initial proposal to eliminate tax credits in so-called enterprise zones because studies have questioned the effectiveness of the policy. The budget analyst said lawmakers can modify the governor’s proposals, such as passing tax extensions for a shorter amount of time or at a lesser rate, and making more expenditure reductions or raising revenues in other ways.
Standard & Poor’s said Thursday that California faces an “important crossroad” for its credit rating depending on how it deals with its deficit. California has the lowest rating in the U.S.
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