Comments on Budget Reserves Brad Williams Testimony to Senate Budget and Fiscal Review Committee February 27, 2014
General Comments • Goals of the reserve proposal are laudable – Stabilize program funding. – Avoid over ‐ commitment of non ‐ recurring revenues. • Provisions in Governor’s proposal to create a Prop 98 reserve and pay down budget debt make sense. – Multiple approaches needed • But all reserve/restraint proposals come with challenges – Will formulas fit changing circumstances? – Will what makes sense in theory work in practice?
Specific Comments on the Capital Gains Proposal • Capital gains is a major source of California’s extraordinary revenue volatility. • But it is not the only source • Using it as a benchmark for reserve contributions has practical challenges: – Actual capital gains not known for 2 years after the fact. – This has led to major differences in capital gains estimates between LAO and DOF – It also raises the question of who would be responsible for determining whether gains are above or below the threshold.
Historical Revenues From Capital Gains 12 10 Billions of Dollars 8 6 4 2 0 1990 1995 2000 2005 2010
Comparison Of Volatility With and Without Taxation of Capital Gains 25.0% 20.0% 15.0% 10.0% Annual Percent Change CA Personal Income 5.0% GF Revenues 0.0% 1990 1995 2000 2005 2010 ‐ 5.0% GF Revenues Excluding Capital Gains ‐ 10.0% ‐ 15.0% ‐ 20.0% ‐ 25.0%
Other Sources of Volatile Revenues • Stock options, bonuses and other non ‐ recurring wage income • Taxable sales of durable goods and building materials • Business income
Practical Problem: What Is the Level of Capital Gains This Year? May Revision Estimates Of (then) Current ‐ Year Capital Gains 80 70 60 Billions of Dollars 50 40 DOF 30 LAO 20 10 0 2011 2013 Year of Estimate
Concluding Observations • Annual contributions and meaningful controls on reserve withdrawals are core features of an effective reserve policy – Both key to building large reserves – Contribution amounts can be based on sliding scale • Using a more current revenue measure makes sense for determining supplemental reserve contributions – For example, total revenues, or major tax revenues, as a percent of personal income • Monthly revenue collections by tax known immediately. • The exact source of revenues is not that important – many forms of revenues can be viewed as non ‐ recurring under specific circumstances.
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