Consumers Are the Key in Budget
Already severely battered by the stock market, state coffers could suffer even bigger losses because of the recent bust on Wall Street.
Though the stock market morass may hurt the state’s balance sheet by diminishing taxable personal income, possibly more dangerous at this point are the revenues that could evaporate if nervous consumers quit spending.
A decline in revenues generated from capital gains and stock options is not expected to deliver the same direct hit on the California budget as the burst of the Silicon Valley technology bubble and coinciding dip in the stock market that contributed to the current $23.6-billion budget gap.
The reason: Stock-option and capital-gain revenues had already fallen so dramatically that state officials were counting on less of them than in previous years.
Revenues from stock options and capital gains climbed to $17 billion in the 2000 budget year before plunging to about $6 billion last year.
The current budget, which remains mired in the Assembly, relies on about $7 billion from the two sources.
Unclear, however, is what role shaken consumers could have on the budget. The state is counting on the sales tax to generate $21 billion. That’s a sizable amount that could be eroded if shoppers, particularly wealthy ones, rein in their spending. Sales and use tax receipts for June came in $122 million below the forecast.
If that trend continues, the double threat of a devastated stock market and weak sales could cause the $9.8-billion shortfall forecast for 2003-04 to mushroom.
The state’s total revenue for May and June came in about $650 million below forecasts. Lawmakers have set aside nearly $1 billion in reserve, which Gov. Gray Davis is widely expected to increase when the spending package hits his desk.
For now, neither the Department of Finance, the state agency that crafts the governor’s version of the budget, nor the state’s independent legislative analyst’s office plans to revise its revenue forecast.
“I think at this stage it’s hard to roll [Wall Street’s woes] into the revenues, but you know that it’s something we need to continue to monitor and watch in coming months,” said nonpartisan Legislative Analyst Elizabeth Hill.
“This is kind of a point-in-time phenomenon,” said Betty Yee, chief deputy director of the Department of Finance. “We’re obviously closely monitoring it, because we’ve had a huge reliance on stock market revenues.”
Finance officials pin their hopes on a pair of upbeat signs that the economy is stabilizing: Job losses are moderating and housing demand remains strong despite a slowdown in construction.
A partisan standoff in the Assembly over the $99-billion budget, which is 24 days overdue, could result in changes, including a reduction in spending or additional taxes. Republicans, four of whom are needed to approve the spending package and send it to Davis, are holding back because the plan already contains nearly $4 billion in new taxes and other new revenue to help close the budget gap.
GOP legislators are calling for additional spending cuts to fill the $4-billion hole, but they face strong opposition from the Democrats.
The standoff has so far caused about 2,400 legislative employees to miss their paychecks.
