Tax Shortfall in State May Hit $1 Billion

The state’s surprisingly large drop in income tax receipts could be $1 billion, rather than the $800 million suggested by Deukmejian Administration officials, a top official in the legislative analyst’s office said Wednesday.

Budget officials, in assessing the huge anticipated revenue losses, said another shortfall of equal magnitude is possible next year.

“That’s a possibility,” conceded state Finance Director Jesse R. Huff in response to a question.

Causes Still Unknown

Huff, who helps Gov. George Deukmejian prepare the state budget, said he and his staff were still attempting to find out for sure the causes of the big drop in tax revenues that he first reported Tuesday.

But a consensus seemed to be forming that the drop was due to miscalculations of the impact of the stock market crash last Oct. 19 and to faulty arithmetic used in calculating the impact of sweeping changes in state tax law adopted last year by Deukmejian and the Legislature.

Deukmejian Press Secretary Kevin Brett said the governor would not announce a plan to deal with the revenue shortfall until the magnitude of the problem is fully understood.

“The governor isn’t going to make any definitive decisions until he has all the relevant numbers and until the Department of Finance identifies the root cause of the problem,” Brett said.

Administration officials and legislative sources expect the drop in revenues to deplete the $1-billion budget reserve and lead to heavy cutbacks in next year’s proposed $44.3-billion state budget. With two months left in the current budget year, officials said there just is not time to cut enough in the current $41.9-billon budget to make up for the loss.

Senate President Pro Tem David A. Roberti called the situation “a crisis of major proportions.”

The upward assessment of the tax loss on Wednesday came from Chief Deputy Legislative Analyst John L. Vickerman, who said estimates of the shortfall “will more likely get worse” than better.

Vickerman said that based on tax payments received as of April 15, “final payments look like they will be down about $1 billion.”

And Brad Williams, the director of revenue forecasting for the Commission on State Finance, agreed with Vickerman’s assessment. Williams said that the shortfall was probably worse than the $800 million to $900 million his agency had reported Tuesday and could approach $1 billion.

Like other state officials, Williams was surprised by the unexpectedly large drop. He said he and other officials had expected revenues to be down as a result of the stock market crash, but no one foresaw the big decline that has materialized.

A major concern is whether the drop is a one-time event, perhaps a delayed development stemming from the market crash, in which investors lost billions. Stock market losses, when reported on income taxes, drive down taxable income. A finding that stock market losses account for the shortfall would be greeted as good news by state officials because it would mean the shortfall was a one-time-only phenomenon.

Officials said they fear that if the problem stems from the sweeping tax change legislation, enacted to conform state taxes to changes in federal tax law, then revenues will be down again next year.

Finance Director Huff, who is responsible for making the revenue forecasts that are the foundation of the state budget, said the tax legislation “is a suspect.”

“The tax law was rewritten from top to bottom. We are going to have to take a look at it,” Huff said.

As for the possibility that next year will bring another drop in tax payments, Huff said, “It’s too early really to speculate. We have to get our arms around the problem first.”

Meanwhile, political fallout began.

Roberti blamed the Deukmejian Administration for misreading the national economy and for making a mistake supporting the $1.1-billion income tax rebate that Californians received last year.

Roberti, who fought the tax rebate much of last year until he was finally forced to accept it after the fiscal year ended last June 30 with a surplus of $1.1 billion, said Deukmejian wanted to “pretend to be rolling in dollars when we are not. That’s exactly what happened last year with the rebate.”

“Economic analysts were telling everyone to be wary, and we weren’t. We were giving money away. It doesn’t take long to have to pay the piper and this is what has hit us,” Roberti said, referring to predictions at the time of a possible economic downturn.

State Supt. of Public Instruction Bill Honig immediately seized on the shortfall to attack Proposition 72, a proposal to lift the state spending limit and provide an additional $200 million next year to finance state transportation programs. Honig, who is supporting a rival proposition, said the budget picture would “significantly worsen” if the initiative passes in the June primary election.