At the CAEZ board meeting yesterday in Sacramento, we had the benefit of hearing a budget update from Tom Sheehy, the Deputy Director for Legislation at the Department of Finance.  He provided us with a rather sobering, but extremely clear picture of the fundamental problems behind California’s chronic budget deficits.

In a nutshell, since the top 1% of income earners in the state pay 50% of all personal taxes collected by the state, when they have a good year the state collects a lot of extra money, and when they have a bad year the state collects a lot less money.  But since in good years the legislature spends all of the revenue it collects, then when there is a bad year the state doesn’t get the revenue it needs to pay for all of that added spending.  According to Sheehy, it is this volatility which is the real root of the problem.

He provided us with the following colorful illustration:  For every Tiger Woods that leaves California, we have to create 4000 new jobs paying $70,000 each to replace that revenue.

Sheehy noted that while it may be politically popular and easy to simply increase taxes on the “wealthy,” that option actually exaserbates the underlying structural problem for future years.

Sheehy also commented on the possibility that the Governor will cut government workers pay in order to save cash while waiting for the budget to pass.  He challanged the notion, as argued by Dan Walters, that the cut is a tactic or gimmick, explaining that the California Constitution does not actually allow any state employees to be paid anything in the absence of a budget.  A California Supreme Court decision affirmed this fact, but then allowed the state to pay workers the federal minimum wage under such circumstances.  The state is likely to face a cash crisis if the budget is delayed too long.

Regarding Enterprise Zones Sheehy said, “I don’t think you have anything to worry about regarding the integrity of Enterprise Zones.”