California: Plunge in state revenue dashes hopes of an easy budget fix

http://www.latimes.com/news/local/la-me-state-budget-20100504,0,680610.story

Plunge in state revenue dashes hopes of an easy budget fix

State tax collections plummeted unexpectedly in April, wiping out months of steady gains that legislators hoped would ease their budget troubles and restore California's economy faster than experts predicted.

Such hope is now fading fast.

Revenue for April, the biggest revenue month because it is when most Californians pay their taxes, lagged projections by nearly 30% — roughly $3 billion, according to state officials. The drop was steep enough to erase improvements recorded in each of the four previous months.

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Economists and finance officials are scurrying to analyze the data to determine what caused the April swoon. Some suspect it sprang from new laws that changed the rhythm of tax payments. It could also reflect the growth in unemployed residents eligible for refunds.

The April collections came almost entirely from personal income taxes. Most corporate and sales taxes have not yet been reported. If they, too, come in below projections, the state's budget problem would grow worse.

The decline sets Sacramento back as next month's deadline for passing a budget approaches. Lawmakers face a deficit of $18.6 billion — about 20% of general fund spending — with no easy options left for addressing it, as they have already cut state services severely and temporarily raised income, sales and vehicle taxes.

"One pillar of the budget solution just got destroyed, and there's nothing that can happen between now and June that can get back the $3 billion," said Stephen Levy, director of the Center for Continuing Study of the California Economy.

The retraction could mean even deeper cuts in government services — schools, healthcare for the poor and services for the elderly. Lawmakers may also be forced to consider more reductions in funds for public universities, as well as tax hikes.

"It's hard to imagine how we're going to [balance the budget] without doing more severe damage to the economy," said state Sen. Denise Moreno Ducheny (D-San Diego), who chairs the Senate's budget committee.

For months, the Democrats who dominate the Legislature have hoped they would be able to balance the state's books with the help of an upswing in revenue, delaying any substantial budget cuts.

"Folks were starting to be pretty optimistic that we were going to be able to bounce our way back from a big chunk of the problem," said Michael Cohen, a deputy in the state's nonpartisan Legislative Analyst's Office. Taxes came in above expectations each month from December through March.

"April basically wiped out those" gains, Cohen said.

He said the state's economy, though on the mend, has been sending "all sorts of mixed messages." Corporations announced higher profits, but the state's stubborn unemployment rate reached a new high in March, 12.6%. Without jobs, Californians are paying fewer taxes and buying fewer goods, which depresses sales taxes.

To balance last year's budget, lawmakers tinkered heavily with the state tax code, speeding up the collection of taxes on businesses and individuals. One theory about the April revenue plunge is that those accelerated collections meant some taxes rolled into the Treasury months earlier.

"The more changes that you make, the more unpredictable it is," said Assembly Budget Committee Chairman Bob Blumenfield (D-Woodland Hills).

Another possibility, economists said, is that many Californians were owed larger-than-expected income tax refunds after losing their jobs in 2009.

Whether the revenue drop augurs an especially sluggish recovery is unclear. Fred Silva, a budget analyst with the good-government group California Forward, said the woeful April returns may reflect taxpayer income from the previous year's recession — not an up-to-date snapshot of the economy.

Ted Gibson, a former state economist, said this was not the first time rising revenue has been followed by a plunge. The flow of state tax revenue, he said, is notoriously hard to predict.

He said the jolt earlier in the year merely "gave everybody an excuse to take a timeout on dealing with the budget. Now they are pretty much back to where they were. And unfortunately, very little has been done in the meantime."

Senate budget committee Vice Chairman Bob Dutton (R-Rancho Cucamonga), who has been critical of Democrats' approach, said, "It's creating a lot of pain the longer you wait to make the necessary changes."

The Legislature's top two Democrats, Senate President Pro Tem Darrell Steinberg (D-Sacramento) and Assembly Speaker John A. Pérez (D-Los Angeles), spent Monday in Washington, pleading for aid from congressional and Obama administration officials. Steinberg said before leaving that their goal was to gather federal commitments for $3 billion to $4 billion.

Gov. Arnold Schwarzenegger is scheduled to update his proposed budget on May 14. The new fiscal year begins July 1.