Proposition 30, Revenue Volatililty and a Balanced Budget

After five straight years of double digit billion dollar budget deficits, it appears that California is finally getting its fiscal house in order. Yesterday Governor Brown introduced his fiscal year 2013-14 spending plan to the Legislature and it is balanced without any new major programmatic cuts. It even projects a small surplus at the end of 2014. Helped by previous cuts, realignments and new revenues from Proposition 30 in November 2012, it would dedicate almost $3 billion in new revenues to K-12 and higher education (both U.C. and CSU). It also aggressively moves to expand the state’s medical program for the poor (Medi-Cal) consistent with implementation of the Federal Affordable Care Act (Obamacare). 

However, because Proposition 30 raises most of its revenue from very high income individuals, it doubles down on a VERY volatile source of revenue: personal income tax. While Governor Brown has succeeded in getting additional revenues and balancing the budget, due to the lack of a spending limit and functional rainy day fund, the boom bust cycles we have seen in the past are more likely to occur in a post P-30 world than they were in a pre P-30 world.