The problem with starting at the top is that there’s nowhere to go but down.
Governor-elect Gavin Newsom will be taking the reins of state government at a time of strong (if unevenly distributed) economic growth and flush state coffers. All that cash will come in handy if he hopes to enact even a fraction of his ambitious policy proposals.
Even so, it’s impossible to seriously consider ending child poverty or funding universal pre-school, as Newsom plans to do, “without having a revenue conversation,” said Chris Hoene, the executive director of the California Budget & Policy Center.
The brewing 2020 ballot battle over whether to strip commercial landowners of Proposition 13 property tax breaks is the most obvious—and potentially lucrative—opportunity. Newsom has not stated clearly whether he supports such a proposal.
But the good times won’t last forever.
“Economic growth may be in the process of peaking as the impact of tax cuts fade and rising interest rates start to curb spending,” said Lynn Reaser, who chairs the state treasurer’s Council of Economic Advisers.
Even if the economy as a whole holds strong, Washington D.C. is its own source of uncertainty. Significant changes to Medicaid spending—which could reduce federal transfers to Sacramento by tens of billions of dollars, for example—“would feel like a large recession hit to the state budget,” said Hoene.
Gov. Jerry Brown has been warning about coming hard times for years now.. He’s been preparing too. By the end of next July, the state is projected to have $13 billion socked away for a rainy day. But most analysts say that cushion will only last a year or two in the face of even a moderate recession.
A downturn will hit the state budget, and Newsom’s ambitions, particularly hard. That’s because recessions tend to have a disproportionate impact on investment returns and roughly 30 percent of the state’s discretionary spending comes from the top 1 percent of earners—the investor class.
Newsom has spoken broadly, if a little vaguely, about the need to rejigger the state’s tax code to flatten things out. Expanding the sales tax to services, an oil severance free and revising the property tax limits of Prop. 13 are all “on the table,” he has said.
But making more dramatic changes to the tax code would be a “multi-year effort,” he concedes. And there’s a reason that governors have avoided tackling this issue for decades.
“Wouldn’t it be nice if we got ahead of that?” said Chris Thornberg of the consulting firm Beacon Economics. “But of course what I would argue is that given history, given what we’ve seen in the past, you bring somebody like Gavin or (former governor) Gray Davis in and, instead of trying to be fiscally prudent, they say, ‘f— it, man, let’s make everybody happy right now.’”
And however the next governor handles the good times, sooner or later, said Mike Genest, finance director to former Gov. Arnold Schwarzenegger, he will have to confront the “slow moving monster:” the growing costs of retirement benefits owed to public-sector workers.
The state Supreme Court will soon hear a case about whether future benefits can be pared down. But even if the court give the governor that tool, he may be reluctant to wield it. And for many cities whose budgets are already being swamped by these costs, that ruling may not hold off bankruptcy, said Genest.
“It’s conceivable that (Newsom will) slide through the whole eight years without it getting to that point,” he said. “But if he does, then the next guy or gal is totally hosed.”
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