Originally appeared in The Sacramento Bee on January 29, 2013. Click here for the full article.
Californians recently learned that this January the state received $4 billion more income tax revenue than it had projected.
There is no consensus as to why projections were so far off. Was it capital gains accelerated into 2012 to escape 2013's higher capital gains taxes? Or receipt of the many dividends companies accelerated into 2012 to avoid 2013's higher dividend tax? Did taxpayers pay their taxes early?
Whatever the driver of the excess revenue, this news illustrates a fact too rarely discussed: The state's actual revenues usually diverge widely from its projections, and now almost always rely on rosy projections that don't come through.
Mandated by law, the governor must present a proposed budget every January, just as Gov. Jerry Brown did a few weeks ago. The proposed budget always includes revenue projections for the coming fiscal year, which doesn't begin for six more months, on July 1.
Those revenue projections are the basis for how the state crafts its budget, sets its spending and handles its debt. Therefore, one would think that accurately estimating incoming revenue would be the most crucial aspect of the early budget formation process.
But instead of providing a reasonable spending plan for the year ahead, January's proposed budget annually ushers in a round of political acrobatics based on wildly inaccurate revenue projections,resulting in discourse far removed from reality.
California Common Sense recently found that since 1997-98, actual revenues have been within 2 percent of January's projected revenues only two times, and within 10 percent of projected revenues only nine times.
Considering the state's nearly $100 billion general fund budget, missing the mark is a big deal. Even being just 2 percent off is a $2 billion error – an amount almost equal to what the state spends on the entire 23-campus California State University system.
Certainly, whether the state overestimates or underestimates revenues does matter. Whereas revenue excesses generate questions about how to most effectively use those revenues, revenue shortfalls force immediate cuts to already budgeted spending.
Continue reading at The Sacramento Bee.