California sales taxes collection drop 50.9%, income taxes 43.6% | Hacker News Reader

California sales taxes collection drop 50.9%, income taxes 43.6%

sco.ca.gov

21 pointsahwachu25 comments

Unlike a prudent household or business, when times are good governments spend every penny, and commit themselves to future spending as if growth will continue without interruption forever. Invariably then, when the downturn hits, rather than cutting the spending and entitlements that caused the problem in the first place, the politicians ask everyone to 'share' in the sacrifice by higher and more ubiquitous taxes. Hence, the effect is like a ratchet, always turning towards bigger government.

Tax revenue has fallen. How do you interpret that as evidence that the government is collecting "higher and more ubiquitous taxes?"

Generally, during a downturn, governments continue spending into debt which is the right thing to do. Their usual fault is in not banking the surplus during good times.

Can you elaborate why you say getting into debt "is the right thing to do"? Why do you think it's unreasonable to reduce spending when tax collection goes down?

Personally, I find the parent's commonsensical prescription appealing. The parent probably meant was that if govt gets into debt, "higher and more ubiquitous taxes" will have to collected in the future to pay for the debt.

Increasing public spending when private spending goes down in a recession is kind of what Keynesian economics is all about. Higher taxes may be necessary in the future, but the idea is that private spending returns faster than it would otherwise, thereby increasing government revenue. Cutting public spending would reduce private incomes, which would exacerbate the recession and lower government revenue even further.

If the idea was to start a discussion about whether the Keynesian response to recessions is a good idea, I don't think that's going to be worthwhile unless there are some economics Ph.D.s around. It's an interesting topic, but something about the internet makes people overly confident in their uninformed opinions.

Google "paradox of thrift."

It's easy to blame this issue on California's politicians, but the problem is the way the system is set up.

The way California's budget process works, we have to have a super-majority to pass a budget, tax increase or cut. So, if the minority party can get 34% of the vote, they can block a budget from being passed.

Couple that with a bug in the system that allows politicians to put a budget item on a ballot initiative. If it passes, it must be funded.

So, it's easier to amend our state constitution (simple majority on a ballot initiative) than it is to pass a budget (67% legislature vote).

And, our revenue base is weighted heavily on sales taxes and income taxes as opposed to property taxes (because of ballot initiatives), and we have really big boom/bust cycles in our tax revenue. It's amazing that California does as well as it does with such a ham-strung system.

It's not partisan differences or the system holding things back, California has a Democrat majority with the votes (24 out of 40) to push things through. Voters there are polling at a 1/3 approval rating for raising taxes. The majority just doesn't want to be the ones responsible for cutting programs or raising taxes.

http://en.wikipedia.org/wiki/California_State_Senate

In addition, their bond ratings are pretty low, they have the lowest rating of any state. The net result of that is that borrowing money becomes much more expensive and the cycle escalates.

http://articles.latimes.com/2009/feb/04/local/me-budget4

You can't run programs with deficits forever, eventually you have to raise taxes or cut funding. Neither are popular positions to have but they are necessary.

So basically our government acts exactly the way most of us do. Democracy in action.

It's actually worse. The government gets to spend other people's money.

Taxes deprive the private sector of money. The net effect of not cutting programs when tax revenue is down is that you have to raise taxes even further to make up the gap increasing depression on the very area you are trying to help grow.

California is facing a 23 billion dollar budget deficit and their bond ratings are junk. It's going to be interesting to see what they do.

Eh, yes, but no. You seem to take the fall in revenues as prima facie evidence that CA is overspending. First, I'm not even sure there is a proper level of spending, but in any case, CA has a peculiar funding structure where we are overly reliant on highly cyclical taxes for revenue. This is by design/evolution, since we enacted Proposition 13 (http://en.wikipedia.org/wiki/California_Proposition_13_(1978... ), severely limiting revenue from property taxes, which would be a more stable / less cyclical funding source.

To be fair, however, fundamentally, CA continues to vote for a government which creates more goods and services than we want to pay for. Schwarzenegger papered this over with a bunch of loans, but eventually we will run up against a wall and be forced to align our desires with our willingness to pay.

Also, worst financial crisis since the Great Depression accompanied by a drop in real industrial output that, IIRC, actually exceeds the Great Depression in speed, and so forth and so on. Plus a state that has been particularly devastated by the housing bubble.

> has a peculiar funding structure where we are overly reliant on highly cyclical taxes for revenue.

Taxable incomes haven't dropped by 50% in CA. What has dropped is the taxable incomes of the small fraction of CA folks who pay the bulk of CA's income taxes.

CA's income taxes are very progressive. That makes them very volatile.

Prop 13 has nothing to do with the volatility of CA's income tax revenues.

> Prop 13 has nothing to do with the volatility of CA's income tax revenues.

It has nothing to do with the volatility of income tax revenues, but it has everything to do with volatility in the budgeting process. By gutting the ability of local governments to fund themselves it pushed all of the taxation up to the state level (and the state turns around and hands most of the money back to the local jurisdictions.) Since the primary revenue generators at the statewide level are income and sales taxes this introduces volatility that is directly tied to the general economic condition, unfortunately the new burdens placed on the state budget as a result of Prop 13 are mostly independent of the general economic condition. This lethal combination leads to a never-ending cycle of boom and bust in the state budget.

> [Prop 13] has nothing to do with the volatility of income tax revenues, but it has everything to do with volatility in the budgeting process. By gutting the ability of local governments to fund themselves it pushed all of the taxation up to the state level

Prop 13 doesn't make state-level taxation volatile.

I thought CA's top bracket was $47,000+...?

There's a "The Mental Health Services Tax Rate is 1% for taxable income in excess of $1,000,000." and there are all sorts of phaseouts that effectively create brackets above the supposed top bracket.

http://www.ftb.ca.gov/forms/catxrate_exmpt07.shtml

> revenue from property taxes, which would be a more stable / less cyclical funding source.

Obviously not a resident of the central valley.

Can you elaborate?

The Central Valley (Sacramento, Stockton, Fresno, Visalia, Bakersfield) has been one of the hardest hit areas in terms of the real estate bubble. Home prices have dropped 50% in some areas. Property taxes are based on property values, and aren't going to be that stable.

One extreme fluctuation in property values doesn't disprove the general historical observation that property tax revenue is more stable than sales or income tax revenue. There are factors that can explain this, such as the fact that sales tax is essentially assessed in real time, income tax every year, and property tax less frequently. (My understanding is that it was every few years pre-Prop 13, and now only when a home is built, sold, or substantially rebuilt.) This lag in assessment will tend to smooth out revenues.

Also due to the way assessment is triggered, a 50% drop in home prices doesn't imply a 50% drop in total property tax revenue -- only for homes that are sold. [EDIT: But apparently one can appeal to have property reassessed without selling, which presumably many people will do with prices dropping significantly.] Furthermore, if sales forced by foreclosure are bias toward the lower price range -- as is the case -- that will further limit the effect on total property tax revenue.

EDIT: See also http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/01/25/... -- a little short on hard data, but suggesting that the variation in property tax revenue is not going to be anywhere close to the 40-50% drop in sales and income tax reported in the OP.

Like many/most CA homeowners, my CA property tax is going up this year even though the value is going down.

How? I've owned for a while, so the post-crash zillow-value is more than value-for-tax-purposes because Prop 13 limits the year-to-year increase in the latter.

I can't find the report now, but the Merc reported that Santa Clara county's property tax revenues would drop 2%. Counties with a lot of recent construction were seeing 10% drops.

I think chancho is pointing out the effects of the crash of the housing bubble. So yeah, I should have said generally far less procyclical.

They seem to be living in fantasy land when they say:

"These numbers appear fairly grim, but there are encouraging signs that the State’s situation is reaching bottom. Although sales tax revenues were down by more than 50% as compared to last April, consumer spending increased by 2.2% nationwide in the first quarter of 2009. Additionally, retail sales have stabilized in the first three months of this year on a seasonally adjusted basis."

Maybe so, but your state sales tax revenues are down 50% YoY! So what if the Feds want to say that consumer spending was up 2.2% in April (a number that is suspect precisely because of state sales tax numbers).

under a redistribution of wealth system you're relying on the top producers to pay for all the shiny social programs. If all those top producers have a bad year at once you're screwed (especially if you have commitments lasting decades).

To be clear, those are y/y per-month changes. Otherwise, this would be even more terrifying than it is.

That being said, the majority of general fund revenue comes from (in order), personal income tax (55%), retail/sales/use tax (27%), and corporation tax (11.1%), and other (6.1%). So a drop in income taxes of 43.6% is far more important than the change in sales tax of -50.9% -- if those rates are sustained, that implies we need to look for something to replace the (0.55*.436 = 23%) of our general fund revenue. Suck.

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