California’s tax surge poses risks

California’s Capitol politicians have a sorry record in handling revenue windfalls, both real and imaginary.

In 2000, the state saw a one-time, $12 billion spike in revenue, thanks largely to a selling frenzy by holders of stock and stock options as a high-tech bubble burst.

Everyone knew that it was a one-time windfall, but then-Gov. Gray Davis and legislators of both parties committed two-thirds of it to permanent spending and tax cuts, leading to huge budget deficits that fueled the recall of Davis.

Six years later, with Davis successor Arnold Schwarzenegger seeking re-election, the state experienced another, albeit smaller, windfall. It, too, was quickly spent, thus worsening the state’s budget deficits from the subsequent recession.

At least those revenue surges were real, although short-lived. Two years ago, as Gov. Jerry Brown and legislators faced another budget gap, they solved it – on paper – by assuming the state would get an extra $4 billion in revenue, extrapolated from a couple of months of higher-than-expected tax collections.

Everyone in the Capitol knew that the $4 billion was most likely bogus, but it served the politicians’ expedient purpose of “balancing” an otherwise unbalanced budget and thus restoring paychecks to legislators that had been cut off because of missing a budget deadline.

Given that history, one is not inclined to be sanguine about how Brown and legislators will handle what could be another windfall.

The state received a big bump in personal income taxes in January – about $5 billion – mostly from quarterly payments by high-income taxpayers.

The surge of money occurs just as legislators begin working on the 2013-14 budget that Brown submitted in January, a budget that does little or nothing to restore “safety net” health and welfare services that the Legislature’s Democrats cherish.

They may be tempted, therefore, to assume that the windfall represents a permanent new level of revenue that could be used for those services, as they have in the past.

That would be a big mistake, because the windfall may be, at most, a one-time phenomenon and is more likely simply to be an acceleration of taxes that otherwise would have been received later in the year.

Personal income spiked all over the country in late 2012, largely because companies issued dividends earlier than usual to beat a federal income tax increase in January, The Wall Street Journal reported.

That bump was compounded by high-income taxpayers’ taking capital gains from recent stock market increases to beat the federal tax man.

Chances are high, therefore, that the January surge in state revenue will be offset by lower collections later in the year. If that’s true, raising spending would be foolhardy – although in keeping with the Capitol’s history.

Dan Walters is a columnist for the Sacramento Bee. Reach him at dwalters@sacbee.com.