Opinion
Reading Los Angeles: Join The Times' new book club
Opinion Opinion L.A.

Gov. Jerry Brown's budget tries to tame wild capital gains

Hey Wall Street, California owes you one.

The prolonged bull market has produced two banner years for capital gains in the state, with an even better year expected in 2014. The result has been surging capital gains tax revenues, which account for all of the surplus projected by Gov. Jerry Brown for the coming year.

Those revenues averaged a little less than $4 billion a year from 2008 to 2011, accounting for about 4.5% of the state's general fund. From 2012 through 2014, the average is expected to be $10.2 billion, or roughly 10% of the general fund.

PHOTO ESSAY: Chris Christie, President Obama and the 'ignorance is bliss' dodge

But as Brown points out in the above picture, capital gains follow a roller-coaster trajectory. They shot up during the dot-com boom, then crashed in the aftermath. They rebounded during the housing bubble, only to collapse again when it burst.

One way to eliminate the volatility would be for the state to not tax capital gains. Wait ... can't breathe ... laughing too hard.... Seriously, voters just approved a ballot measure in 2012 (Proposition 30) that made the state more dependent on capital gains revenue, not less. The idea of lightening a burden that falls disproportionately on higher-income Californians is a nonstarter in the Golden State, regardless of any merit it might have as a policy.

Still, the volatility is a real problem, and the state's current mechanism for smoothing out the revenue peaks and troughs simply doesn't work. That would be a ballot measure from 2004 (Proposition 58) that required lawmakers to put 3% of the annual revenues into a Budget Stabilization Fund until the fund's assets were equal to 5% of the general fund or $8 billion, whichever was larger. But the measure allowed the governor to waive the requirement by declaring a fiscal emergency, which former Gov. Arnold Schwarzenegger and Brown have done repeatedly.

Another problem with Proposition 58 is that it requires the state to kick money into the reserve fund regardless of what's happening with the state's economy. A proposed ballot measure set for November (ACA 4) is better on that front, basing the state's mandatory contribution to the reserve fund on the amount of unanticipated revenue -- that is, the amount that exceeded the 20-year trend line in revenues.

Still, that proposal has at least two real flaws. One is that it doesn't address the volatility in the amount of school funding guaranteed by Proposition 98, which is just as susceptible to the ups and downs in capital gains as the general fund is. The other is that under ACA 4, mandatory contributions to the reserve fund are triggered by surges in revenue as a whole, not just capital gains taxes. So it could act as a counterweight to sustainable increases in revenue that spring from a healthy economy, not just to the peaks associated with capital gains.

Brown has asked lawmakers to give voters an alternative to ACA 4, one that would direct excess capital gains revenue into the reserve fund and create a separate reserve for school funding. His proposal would also allow the state to use surplus revenue to pay down debts and unfunded liabilities instead of building the reserve, which ACA 4 does not.

The governor left the details of the new ballot measure for the Legislature to work out. At least one top legislative leader -- Assembly Speaker John A. Perez -- has embraced the idea of replacing ACA 4, so it seems likely that lawmakers will take up Brown's invitation to come up with an alternative.

ALSO:

How grim is L.A.'s future?

Liz Cheney's problem wasn't her famous name

McManus: Edward Snowden, in shades of gray

Follow Jon Healey on Twitter @jcahealey and Google+

Copyright © 2015, Los Angeles Times
Related Content
  • An ill-considered mandate on school funding
    An ill-considered mandate on school funding

    A stronger state economy, voter-approved temporary tax increases and new budget rules have helped drain some of the drama out of the Legislature's annual budget process. And with lawmakers now having completed that process on time for four consecutive years, one might be tempted to say that there's...

  • When lawyers go bad
    When lawyers go bad

    Few things are harder to accomplish for an attorney than getting disbarred.

  • California lawmakers approve blank budget bills
    California lawmakers approve blank budget bills

    One day before Gov. Jerry Brown is scheduled to release his updated spending plan, Democrats in the Legislature began lining up empty bills to streamline the budget process.

  • Bill on drug pricing would help state in figuring healthcare costs
    Bill on drug pricing would help state in figuring healthcare costs

    A new crop of specialty drugs holds great promise for treating or even curing some devastating diseases, but their high cost challenges health insurers and taxpayer-funded health programs. In California, Gov. Jerry Brown has asked for $300 million in the coming fiscal year's budget just for specialty...

  • Carolyn Ramsay for L.A. Council District 4
    Carolyn Ramsay for L.A. Council District 4

    The race to replace longtime City Councilman Tom LaBonge started out promisingly — there were 14 candidates from inside politics and out, some more serious than others, but enough who were smart, enterprising and scrappy. Now, after an appallingly low turnout primary in a district known for its...

  • Should L.A. really manage the Greek Theatre?
    Should L.A. really manage the Greek Theatre?

    The city of Los Angeles, which has enough problems getting the streets paved and the trash picked up, may now be getting into the concert business. Earlier this month, after a nasty, political fight over which of two entertainment giants should be awarded the multimillion-dollar contract to operate...

  • Shorter showers? Nine more ways the state has to change its water ways
    Shorter showers? Nine more ways the state has to change its water ways

    Heading into the fourth summer of drought, water agencies are looking for ways to get Californians to conserve at home. Tear out lawns. Install low-flow toilets. Irrigate with gray water. But what should the whole state be doing? Opinion asked nine water experts what needs to change about how California...

  • Evolving awareness is cause for same-sex-marriage optimism in court
    Evolving awareness is cause for same-sex-marriage optimism in court

    On Tuesday, the Supreme Court will hear oral arguments in the Ohio case of Obergefell vs. Hodges, as well as three related cases from Kentucky, Michigan and Tennessee. The court is then expected to decide whether the Constitution requires states to grant gay people the same rights in marriage as...

Comments
Loading