California’s Strong Economy and the Tax Policy

The sunny state of California is not only known for the most beautiful beaches, the biggest film industry Hollywood, and the wealthiest neighbourhoods like Beverly Hills, but it also shines in prosperity and well-being with a strong economy that ranks high on the list of the biggest economies in the USA and in the world. Well, according to its government, a rainy cloud might be on its way to throw some shadows on the prosperous economy.

The Pillars of California’s Economy

California abounds in versatile economic sectors, each of which contributes to a stable economy in the vast land of the Californian State. California is well-known for its massive export industry, especially in dairy products and the almond production and exports which account for multi-billion dollars of revenues. Along international trade, reflected in exports of electronics and computers, as well as transport services, tourism is also a big income-stimulator with a lot of attractive sites and warm weather which keep the tourists coming. The oil industry is also not to be neglected, since the Californian coast is one of the richest oil areas.

Despite California’s prosperity, the state budget seems to stay limited which the policymakers blame on the Californian tax system which seems not to be fulfilling its role – sufficient public funds. California’s budget was revised in 2016 under Governor Jerry Brown who fears budgetary deficits as the former tax-increase program is about to expire and he calls for public spending cuts when the new fiscal year starts, as of June 1 2017. He urges lawmakers to restrain from costly unnecessary spending programs as he predicts a recession period in the new fiscal year. Paradoxically, he proposes measures which include pre-mature overspending in order to prepare for the recession.

The California State budget already saw cut costs even this year due to fluctuating prices in the stock market which resulted in the shortfall of income taxes. One of the biggest economic boost indicators is of course the stock market, but it is somewhat risky to rely on the market as a key factor in state revenue raising, which California does. The volatility of the market is too high to use the stock market as a safety net.

California is also one of the states with the lowest credit rating, even if it economy still looks stable and strong from the side. California’s economy has nothing to do with budgetary deficits of the state since they were incurred by an inefficient tax system and are not the result of a declining economy. Furthermore, California’s employment rate declined from 5.4% to 5.3%, and the last time it was this low was nine years ago. The un/employment data show clearly that the economy is not the problem that causes shortcomings in the state budget.

California and its Tax Structure

Again, California relies on the stock market when it comes to filling the public budget whereas the volatility of the market poses tremendous risks as it can always take a sudden turn downwards. The USA is already known for its top 1-10% top revenue providers which consist of the rich American elite. In California, the top 1% of tax payers account for almost half of revenue taxes collected on income which equals 2/3 of overall income taxes. Capital profits have been one of the biggest tax collection strongholds in California for a series of years.

The Revised Budget Plan and Program

Fearing recession in the upcoming years, the revised budget plan includes a savings policy which would result in a $8.5 billion surplus by the end of this fiscal year to serve as reserves in the period to follow. Namely, the Californian government believes that they could suffer a 55 billion reduction in public funds in the next three years. The governor is even ready to impose premature cut measures, and, as already stated, he calls for restraining from unnecessary public costs, ready to redirect a part of the existing budget for funding employees’ retirement benefits in advance, as well as leaving aside 2 billion dollars for the recession period to come.

The trigger for the budget revision was the April shortcoming which shook up the Californian budget leaving it short of $1 million. Even if financial experts claimed that it did not represent a threat, the governor seems to have a different opinion. Other budget modifications include a plan to raise the minimum wage to at least $15 per hour, wherefore a $3.4 billion allocation is envisioned. He also advocates for an increase in gas taxes and fees, which the republicans do not approve of. The overspending of the current budget in order to prevent future shortcoming is not welcomed by all government members.

Fiscal stress tests were conducted across America to estimate their preparedness for a recession and California ranked 19th out of 20 US states, which was yet another red flag for Governor Brown. One of the reasons was of course the reliance of the state on income tax (which are heavily influenced by the stock market), whereby the technology industry was particularly emphasized as highly volatile.
The Government of California has yet another measure in mind which implies extending the temporary increased taxes measure for yet another period. The measure was adopted as a temporary solution in 2012 via voting, and voting on its extension is planned for November 2017 as well.