Transcript: Press briefing Q&A w/ LAO Mac Taylor on California’s fiscal outlook for 2014-15 – Part III

Part III – Partial transcript of the press briefing Q&A with Legislative Analyst Mac Taylor on California’s fiscal outlook for 2014-15. The press conference was held on Nov. 30, 2013:

Question:
…[Inaudible]

Mac Taylor:
Yeah, just help me out on Twitter, because we didn’t make a specific adjustment to our numbers as we did for Facebook. It’s not near the magnitude, and we always assume some IPO activity. Twitter clearly is a California-based company. It’s an important one. And it could mean there’s a little bit of even [inaudible] by us because we don’t have a specific assumption. But we do always assume certain amount of IPO activity.

But on your first point, which is a really good one, the personal income tax now is responsible for two-thirds of our general fund. That’s dramatically different from 30 years ago when it was probably one-third. And it’s not necessarily bad that the personal income tax is two-thirds. It’s a robust tax, people like it, and it’s used throughout the country and at the federal level. It’s just that if you’re going to be heavily relying on it, you have to constantly be reminded about volatility that’s implicit in relying on a tax that at the margin – capital gains – can change very dramatically. And when capital gains change when the market’s downturn, the earlier question we had, you’re talking about people who have lots of control over when they realize gains; you’re talking about people taxed at very high rates so you’re not losing 5% or 6% on that dollar, you’re losing 12% or 13% on that dollar. So if you’re going to be heavily relying on personal income taxes, what it suggests to us is you have to have very strong reserve practices and, secondly, you have to be very careful when you’re coming out of a recession and things are improving not to over commit on spending to ongoing programs. And that’s another sort of – if I didn’t sort of reflect that when I was talking about figure 4, again, that’s why we try to rely more heavily on the one-time things early on and then if you are going to make additional commitments that are ongoing in nature – and if you look at that chart, the last three categories are ongoing – you’ll see that we build them up more slowly and incrementally such that if two years out we’re seeing that our revenue estimates aren’t accurate or the market has a minor downturn, we have a lot less money, you’re in a much better position to adjust to that…We try to remind the legislature of the uncertainty, the volatility surrounding our revenue numbers.

Question:
Do you factor in any of the so-called migration of multi-millionaires out of state?

Mac Taylor:
Not explicitly.

Question:
Do you see that at all happening?

Mac Taylor:
Well, we’re not seeing it in a way we can quantify. We certainly know anecdotally and that just from sort of logic would dictate that some people are changing their behavior. Maybe they’re not expanding here. Maybe there’s people that didn’t come here now because of our temporarily high rates, that maybe they’ll come in 19-20 if the rates go back down to the 9.3% level. We know that maybe some people when they retire several years from now will decide not to pay their higher taxes in California; they’ll go some place else. So, we know at the margin some of that is happening but it’s not of such a nature right now that we can quantify or explicitly account for in our forecast.

Question:
…The corporation tax revenue kind of stands out…[inaudible]

Mac Taylor:
Yeah, corporation taxes because of all of the things we’ve done to it in prior years – net operating losses, credit sharing, the research credit – it’s very difficult to forecast. And frankly, we don’t have a great handle on it. We try to acknowledge that in the write-up. We do expect taxes to do better over the future as maybe some of those effects from the tax changes sort of play out. But the tax has not been doing well in recent times.

Question:
The speaker towards the end of last year and then certainly said that he wants to come back to it this year, this idea of establishing his idea of a rainy day fund, which is based on capturing excess capital gain. In your view, would that approach help reach the level of budget reserve that you’re talking about?

Mac Taylor:
You know, I think the speaker’s approach is very similar to ACA 4, which is scheduled to be on the ballot. And it’s trying to do the right things of, one, taking money off the table during good times. The speaker does it by driving off capital gains in excess of a certain amount; ACA 4 does it in a little different way. And then building up your reserves. So both approaches in principle, I think, are great. It’s exactly what we should be doing in practice. Technically, does it work because, you know, capital gains income we don’t know about until two years after the fact? I think the issues that we have are more of a technical nature if he can make it work. In concept, though, it’s exactly the right approach of realizing what your volatile revenue sources are and when you have higher than average trying to take that money off the table.

Question:
Is the first year in recent years that this outlook has shown a surplus?

Mac Taylor:
No, I think last November we showed…for the out-years…we showed those surplus. We showed the same trend. And then if you go back in May, you’ll see almost exactly the same pattern. It just steps up a little bit faster and then we show three more years. No, it’s not that much different from where we were in May.

Question:
Can you put this in perspective – the big picture – where California has been and how far it’s come?

Mac Taylor:
Well, clearly from going to deficits that were in the $10 to $20 billion range – the sort of sea of red that we used to show you – to these sort of operating surpluses over the period is a significant turn. And again, it’s for a variety of reasons. We finally have an economic recovery – the best way to grow yourself out of problems. We have Proposition 30, which has provided obviously relief in additional revenues even though some of that does go to Proposition 98 spending. And all of the efforts that the legislature took during the bad years of slowing the growth in many programs or, in some cases, taking deduction in programs, whether it’s CalWORKS grant levels or other things like that, clearly also helps put us in a position now where we can look at operating surpluses.

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One Comment on “Transcript: Press briefing Q&A w/ LAO Mac Taylor on California’s fiscal outlook for 2014-15 – Part III

  1. Pingback: Transcript: Press briefing Q&A w/ LAO Mac Taylor on California's fiscal outlook for 2014-15 - Part IV | What The Folly?!

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