The state of California is entering the new fiscal year budget wrangling period. What the legislature in Sacramento was hoping for in April with generous tax revenues actually turned out to be an absolute bust. The California housing bubble bursting is still having deep ramifications for the future of the state. Unfortunately what we are now finding out is Sacramento put blind faith behind the federal government bailing out the state and overly optimistic revenues in April. None of those have come to fruition and now the hard budget work will begin once again. In this election year, you’ll be hard pressed to find any politician backing any tax hikes. So more cuts seem to be in store for the state but those calling for massive cuts fail to connect the dots that unemployed people will not be buying homes or spending freely. In other words, the economy of California is in trouble for at least the next fiscal year.

Part of the problem is how California collects revenues:

Over 81 percent of tax revenues come from the most volatiles sources possible. Half of tax revenues come from personal income taxes. Well if 12.6 percent of your state is officially unemployed (23 percent underemployed), you have a large batch of people not paying any personal income tax. At the same time, the deep recession has cut into sales taxes as well because people in recessions don’t spend as much. This should be abundantly obvious but that is why California has been in boom and bust cycles for the past two decades. The housing bubble has cut deep into the middle class of the state.

Remember all that talk about the vehicle license fee? Look at the chart above? This is 1.7% of the entire budget. Time to focus on the actual systemic problems instead of politicizing the smaller easier to gun for line items on the budget that really don’t even put a dent into the real issues. Even now, many counties in California are charging nearly 10 percent in sales tax. This is an incredible amount because this is taken out of net income that has already been taxed by:

Social Security Medicare Federal Tax California State Tax CA SDI

By the time most Californians get their net paycheck, it has been chopped so low because of all the above taxes. Then, when Californians shop they get another bill through the sales tax of nearly 10 percent. And you wonder why things are spiraling in the state? If you are middle class in the state, good luck with inflated housing prices in niche markets and massive amounts of taxes.

In entering the realm of the absurd, California is now planning on selling ad space on get this, electronic freeway signs:

“(McClatchy) In his latest effort to patch California’s cash-strapped budget, Gov. Arnold Schwarzenegger has resurrected an idea to convert overhead freeway displays into electronic advertising billboards. Under the plan, a billboard company would replace existing digital displays that show abduction-related Amber Alerts and traffic updates with sophisticated color screens that also show advertising. The state currently operates 708 electronic boards on highways. The proposal faces significant hurdles, particularly obtaining a U.S. Department of Transportation waiver of federal highway regulations. The governor sees the plan as a way to generate revenue and improve the technology of the warning signs, but critics fear the new signs would distract drivers and lead to more accidents.”

Now this isn’t a big surprise although selling freeway space is. All we need is for politicians to wear NASCAR like jumpsuits with their corporate sponsor logos. In fact, the projections already had this baked in:

We already knew back in 2007 that revenues were going to be trailing in the state. And what was done? Last year, much of it was with cuts, tax hikes, and basically borrowing more money. In that time nothing drastic has changed although the budget conditions do warrant this given the California budget.

And things continue to get worse. California has the largest population but also the largest number of people receiving food assistance:

As we have been saying for months, we are clearly on path to reaching 40,000,000 people on food assistance nationwide. Since the recent data only goes back to February it is very likely that today we are already over that number. California unemployment benefits are being paid out in large numbers and we have already had to borrow from the federal government here as well.

The budget debate is going to get heated and will consume the entire summer. The Governor will release his initial budget and dogs will be set free to fight for scraps. The gap got bigger with the miss last month:



The expected amount was over $10 billion so they were off by $3 billion. So the actual gap will be approximately $20 to $21 billion (a sizeable amount). It’ll be interesting to see how things play out given the political nature of the year. In fact, with California still deep into a recession it is likely few politicians will take any strong measures one way or another.

California home values still remain depressed and it is easy to understand. It is also the case that California home values no longer have the leverage of exotic no-doc loans that allowed people to buy much more than they could actually afford. This also hid the fact that actual incomes really never went up to justify prices.

Gear up because the California budget is going to get messy. California is a $1.8 trillion economy so it is naïve for non-Californians to think that big issues here won’t ripple throughout the country. Just look at what tiny Greece has done to the European Union.

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