California’s $1-Billion Surplus Tops Among States

California’s year-end surplus of more than $1 billion last year represented 11% of all the taxpayers’ money remaining when the 50 states closed their books on spending for 1984-85.

Only Vermont ended the budget year with a deficit, the Council of State Governments reported in a study of last year’s state tax and spending policies.

Taxes went up in 25 states and down in 20 states in 1985 for a net tax reduction of $1.1 billion.

But, the council said, less than half the states had reserves, or surpluses, of 5%--generally considered a minimally prudent level by fiscal analysts.

The total surplus for all 50 states at the end of fiscal 1985 was $8.9 billion, or 4.5% of total state spending.

California began its current fiscal year last July with a budgeted reserve of $1.05 billion, but emergencies and unforeseen spending needs have reduced the fiscal cushion to under $800 million.

Law Provides for Rebate

An economic upsurge in 1986-87 could force the state to rebate surplus money to taxpayers under a never-before-used provision inserted by voters into the California Constitution in 1979 to limit government spending.

The new state budget proposed by Gov. George Deukmejian is just $100 million under the spending limit permitted by the state Constitution.

The council, headquartered in Kentucky, reports that states in 1985 “steered a moderate course on taxing and spending” in anticipation of tighter times ahead.

“Budget and taxes are a highly volatile issue for 1986, especially in the face of federal budget deficit reduction,” it said in its January issue of State Government News.

Despite looming fiscal threats, income taxes were reduced a total of $1.6 billion last year by 13 states, while Nebraska and North Dakota raised their rates.

Oklahoma raised its sales tax rate by a quarter cent, to 3.25%, but Oregon voters defeated a sales tax proposed by the Legislature. Sales tax exemptions won approval in Connecticut, Iowa, Minnesota and Tennessee.

Motor Fuel Taxes Rise

Motor fuel taxes, primarily earmarked for roads, increased in 16 states. Cigarette taxes were raised in 23 states. Alcoholic beverage taxes rose in seven states. Eight states reduced inheritance or estate taxes.

While corporate income taxes were raised in Oklahoma and Kentucky, they were lowered in New Hampshire and Oregon.

California was not among states that raised or lowered tax rates. But the Legislature last year did consider revising the controversial unitary method of taxing multinational corporations. The unitary method, strenuously opposed by overseas firms, was repealed in Colorado, Indiana and Utah.

Despite strong pressure from the Reagan Administration to end the system, Deukmejian has said revisions may have to wait in view of threats to the state treasury posed by federal cutbacks. The method taxes multinational firms based upon a percentage of their activity in California.

Lottery Helps

California’s treasury was bolstered by a new state lottery, which has grossed $1 billion since its start-up in October. One third of the money is earmarked for schools, with the rest going to operations and prizes. Iowa and Oregon also opened lotteries last year.

Missouri and West Virginia expect to begin their lotteries in 1986, bringing the number of state lotteries to 22. “More states are likely to look at this source of revenue in 1986,” the council predicted.

It said last year’s biggest tax cuts came in the Northeast and Midwest, where tax increases were concentrated during the recent recession.

This year, state surpluses are expected to decline and spending likely will be conservative, it said.

“Any downturn in the economy or major change in federal policy could well play havoc with state finances in 1986,” the council reported. “The prospect for continued reductions in state taxes is dependent on continued economic prosperity.”