Calling All Scapegoats
The search for scapegoats is under way in Sacramento after the startling disclosure that the state of California may fall as much as $1 billion short of expected income-tax collections this year. “Things are pretty chaotic right now,” one fiscal insider said. The finger-pointing has begun.
But it is entirely possible that nobody is to blame. There may have been no single big goof. In fact, the state may not really know how big the shortfall is until October or November. There is a chance that the miscalculation may not be as large as the $800 million to $1 billion now being discussed in gatherings of gloom in Sacramento hallways. Some think that it may be more.
For every good theory about the cause of the shortfall, there is an equally credible counter-theory. More than one scenario turned out to be wishful thinking. One started out as a joke, and soon was making the rounds as plausible fact: The notion that the mail truck from Beverly Hills with all the rich peoples’ tax returns got lost on the way to Sacramento.
One potential scapegoat was intriguing: a Washington, D.C., firm known as Policy Economics Group, formed by experts from the Treasury Department and Congress’ joint taxation committee who had worked on the 1986 federal tax-reform law. Sacramento sources said that the officials left the government armed with critical federal tax data and contracted with as many as 20 states, including California, to develop economic models of the effect that federal tax reform would have on state tax systems. “They had a lock on the market,” one official said. Another thought that the group’s data was not so good, hinting that Policy Ecomomics Group--now a part of the accounting firm of Peat, Markwick, Main & Co.--might be at fault.
Other experts in Sacramento stood by Policy Economics Group. One noted that the firm proposed that California make a rather conservative estimate of income from the capital-gains tax, but that the advice was ignored by the Department of Finance and the state Franchise Tax Board. If so, that decision alone could account for at least several hundred million dollars of the estimated shortfall.
Optimists in Sacramento have heard that an extraordinary number of Californians applied for extensions for filing their returns. These presumably were people with large bills and complicated returns made even more confusing by tax reform. But the Internal Revenue Service in Fresno said that the number seeking extensions for filing federal returns, which have to be completed before the state forms can be, was running just about the same as last year. A Sacramento source noted, though, that many of those filing for extensions did not include tax payments. So there is some hope for a big rush of cash into the state treasury when the late filers come in this fall. But don’t bet the Capitol dome on that prospect.
The capital-gains tax does seem to have been a major villain. Capital-gains income is difficult to estimate because that involves trying to predict human behavior. Just when and why will someone sell stock or other investment property? Clearly, many people sold in late 1986 to avoid higher federal tax rates at the start of 1987. This provided California with most of the big income-tax windfall and rebate last year. But it also reduced prospective revenue for the succeeding years. Then came the stock-market crash of October, 1987, to muddle the situation even further. The state legislative analyst’s office and others had warned that estimating the capital-gains income was extremely hazardous under such conditions. Prudence should have prevailed, and perhaps it did not.
It may be little comfort, but New York and Massachusetts are experiencing unexpected tax shortfalls, and the volatile capital-gains tax is suspected. Other states are likely to be heard from. In Sacramento, tax experts talk about the difficulty of estimating revenues when there is no historic data base. But policies had to be formulated and judgments made. So perhaps there is no scapegoat. Things don’t always work out as they should.
