The Legislative Analyst Takes A First Cut at Gov. Brown’s Very Optimistic Budget Plan

The amount of revenue Gov. Jerry Brown says California will receive over the next 18 months is $3.9 billion less than the Democratic governor says, according to an initial review of his spending plan by the Legislative Analyst.

About $3.7 billion of the difference is in estimates of state income tax collections, primarily taxes on capital gains.

The Democratic governor says California taxpayers will reap $96 billion in capital gains in the 2012 tax year. The analyst says $62 billion. That’s roughly $3 billion of the $3.9 billion difference in expected tax revenue.

“Our revenue estimates – including estimates of state revenue gains from the governor’s proposed initiative – currently are lower than the administration’s,” the analyst writes.

“Already California’s budget is dependent on volatile income tax payments buy the state’s wealthiest individuals and the governor proposes that these Californians pay more for the next few years. As has become evident in recent years, differing fortunes for these upper-income taxpayers can create or eliminate billions of dollars of projected state revenues.”

The top 1 percent of filers pay roughly 40 percent of state income taxes.

More ominously, the analyst says:

“If our current revenue estimates are closer to the target than the administration’s, the Legislature will have to pursue billions of dollars more in budget-balancing solutions.”

Making the state’s cash-starved general fund solvent can be done in one of three ways: Raising the amount of revenue it receives, reducing the cost of services it provides or a combination of the two.

As to the analyst’s assessment, Ana Matosantos, director of the Democratic governor’s Department of Finance said this:

“As both we and the analyst’s office have indicated, revenue forecasting during this time of economic uncertainty is difficult.  This is particularly the case when estimating the income of top earners. Income for this group is growing faster than income for the rest of taxpayers during the economic recovery. 

“We and the analyst’s office have different estimates of exactly how fast income for these earners will increase. Some have commented that our revenues are too low and others have said they are too high. We believe they are just right.”

The analyst notes that its forecasting method differs from the Brown administration making comparison difficult. But even when comparing apples to applies, the Brown administration is still far more optimistic.

For example, the Democratic governor predicts federal tax cut rates from 2001 will expire at the end of 2012, as scheduled.

The analyst doesn’t.

Brown says the expiration will drive taxpayers to cash out capital gains in 2012 under the more favorable rates than wait until 2013.

So the analyst removed the tax shift effect from its assumptions.

Even without it, Brown estimates $20 billion more in capital gains than the analyst each year for two years.

“Over time, (the Department of Finance) assumes capital gains begin to approach levels only experienced during previous stock market and real estate ‘bubbles.’ We advise the Legislature to regard these estimates with some caution.”

The analyst also reiterates his view that the Democratic governor’s plan to increase state income taxes on upper income California for five years and boost the sales tax by .5 percent will generate $2.1 billion less than the nearly $7 billion Brown estimates.

Brown’s budget is balanced based on his proposed initiative for the November ballot  yielding nearly $7 billion. 

Elsewhere, the analyst notes, “Forecasting capital gains and other income of wealthier Californians is extremely difficult.”

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(See a summary video in the Spotlight at California’s Capitol)