Legislative Analyst Projects More Revenue; Echoes Governor’s Call for Fiscal Restraint

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BudgetIconThe nonpartisan Legislative Analyst’s Office (LAO) this week released revenue projections a few billion dollars higher than estimated in the Governor’s budget plan, but also advised a cautious approach to spending the additional revenue.

General Fund revenues for the 2015–16 fiscal year will be nearly $3.1 billion greater than forecast by the administration—$116.335 billion rather than the $113.281 billion, the LAO said.

The LAO projections assume a slowdown in retail sales growth next year, very low inflation this year, and stagnant residential building activity. More than half of the difference between the administration’s and LAO’s revenue projections appears to come from the LAO’s higher estimates of taxpayer income from capital gains, which are very changeable.

Volatile Revenue

Like the Governor’s presentation of the May budget revision last week, the LAO analysis of the revised plan included several reminders of the volatility of California’s revenue system.

“But just as the state’s revenue picture has improved significantly over just a few months, it can just as easily reverse course with a stock market or economic downturn,” the LAO report stated. “Restraint in approving new ongoing programs is key to preventing an unsustainable spending base.”

Pointing out that “resolve in building a large budget reserve is key to blunting the effects of sharp revenue declines,” the LAO noted that the state will have just $3.5 billion in its rainy day fund at the end of 2015–16, far below the $12 billion goal voters approved when passing Proposition 2 last fall.

Proposition 2, revenue volatility and the state’s complex education funding formula make it difficult to estimate how much new spending the General Fund revenues can support, the LAO commented. “In light of these challenges, we suggest that the Legislature tread carefully in authorizing new spending commitments or tax reductions.”

Earned Income Tax Credit

The LAO described the proposed state Earned Income Tax Credit (EITC) as one of the Governor’s “most significant priorities for available discretionary resources.”

A December report from the LAO described the federal EITC as among the most significant antipoverty programs. Although the state proposal differs from the federal program “in substantive ways,” the LAO wrote, “we believe it could benefit many of the state’s lowest-income residents.”

The administration estimates as many as 825,000 families may benefit from the new tax credit: 85% of the federal credit for working taxpayers with incomes less than $6,850 (with no dependents) or $13,870 (with three or more dependents). The credit would amount to $460 on average to working households, to a maximum of $2,653, according to the state Department of Finance.

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