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California’s Tax Hike Did Not Work

California
California

California’s tax collections grew at around half of what the state projected for 2010—indicating that the state’s fiscal situation may be even more dire than previously understood.

California’s tax collections grew 3.79 percent last year, according to data released by the US Census Bureau. At the start of 2010,California was projecting revenue growth of 6.5 percent.

California began raising taxes in 2009, in response to a huge drop in tax revenues caused by the recession. In 2009, California tax collections were 13.9 percent lower than they were the year before—putting severe strain on the state’s budget.

But two years of tax hikes have produced far less impressive results than state officials expected.

The increased income, sales and car taxes were supposed to be temporary measures to keep California’s state government fiscally healthy until the local economy recovered and the state’s budget deficit could be addressed. The underperformance of the tax increases, however, has thrown a monkey-wrench into the plans.’

Governor Jerry Brown is pushing lawmakers for a state referendum that would ask voters to extend the taxes for another five years. He would like to hold the referendum in June, before the start of the 2012 fiscal year in July. But Republican lawmakers have been resisting the measure—and some now predict a referendum might not happen until November.

The budget problems have shut California out of the bond market.

Basically, state officials fear that any bond sales made before a resolution of the tax and budget issues would result in the state having to pay unsustainable high interest rates. Earlier this year, Brown and California Treasurer Bill Lockyer agreed in January to postpone general-obligation bond sales until this fall. More recently, Lockyer has been saying the state might not sell any general obligation bonds in 2011.

It’s not clear whether the bond market will be satisfied if the tax increases are extended. The underperformance of the increases indicates that state officials may still be unrealistically optimistic—and therefore wind up spending and borrowing too much. The state could find itself penalized by the bond market for over-estimating the revenue gains from tax hikes.

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