California Economy Grows Despite Lower Tax Revenue

Despite the fact that California's tax revenues are down 27 percent from a year ago, the Golden State's economy is apparently growing.

Governor Schwarzenegger's Special Advisor for Jobs and Economic Growth, David Crane, released a memo today revealing data from the Bureau of Economic Analysis showing that California's economy grew 0.4 percent in 2008.

The BEA says "declines in construction and finance and insurance were slightly more than offset by growth in information and in professional and technical services".


Still, California's growth rate was only the 34th best in the nation. Alaska came in last, with an economy that contracted 2 percent in 2008, while North Dakota was #1 with more than 7 percent growth in real GDP.

Also, the Federal Reserve Bank of Philadelphia compiled a list of each state's economic performance. All 50 states were down from a year ago, but California had the 16th best performing state economy in the country.

So why is the economy in California growing while tax revenues are dwindling? According to Crane, it's the state's tax system, which relies heavily on capital gains. Good times bring good years, bad times bring bad years.

"Because California's tax system reflects Wall Street's economy more than California's economy, our budget revenues are down dramatically," Crane writes.

This summer Sacramento will get recommendations from a Tax Modernization Commission to change the state's tax structure.

"A tax system that looks more like California's economy will be much more stable than the current system," Crane said.