How Props 30, 39 Help Make Budget Harder to Predict, Balance

The victories of Propositions 30 (Gov. Jerry Brown's temporary tax on sales and income) and Prop 39 (investor Tom Steyer's change to the state's corporate tax formula) are being praised for bringing dollars into the budget in the short term.

But they also have costs -- and may make the budget harder to project accurately, and to balance in the long term.

So says the non-partisan Legislative Analyst's Office (LAO) in its report looking at the upcoming 2013-14 budget. That update has produced headlines focusing on the shrinking of the budget deficit and the possibility of surpluses in future years. But in the finer print, the LAO raises questions about how the current budget handles revenues from Propositions 30 and 39.

The LAO report says that the current budget act will retroactively accrue tax revenues, from, for example April 2013 back to the 2011-2012 year.  This could have the political advantage of making prior year budgets look more balanced, but the LAO says that's a problem because of the uncertainty created.

One effect of the change is that we will no longer have a good idea of a fiscal year's revenues until one or two years after that fiscal year's conclusion.

Because the volatile capital gains-related revenues from Proposition 30 are the subject of the accrual changes, the late adjustments to revenues could total billions of dollars -- much more than in the past. As a result, the chances of large forecast errors by us and the administration will increase.

Bottom line: California's notoriously hard-to-predict-and-balance budget becomes harder to predict and balance. Indeed, Californians may not be able to know whether the budget was balanced in a particular budget year until two years after that budget year.

The LAO recommends that the legislature direct the Brown administration to develop a "simpler," more logical system for accruing and counting for revenue by 2015, and that the administration document what it's doing on this online.

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