Stock Market Plunge

By Chris Megerian and Phil Willon
August 24, 2015

Gyrations in the stock market have taken California’s fragile finances for a ride before — when the dot-com bubble burst, when the Wall Street crash sank the national economy less than a decade ago.

So as the market continued its drop Monday, officials began glancing around for their seat belts.

More than most states, California depends heavily on taxing the wealthy, pulling about half its income tax revenue from just 1% of residents in recent years. A sustained, significant fall in capital gains could mean a return to budget crises, and the turmoil on Wall Street is a reminder of that vulnerability.

Gov. Jerry Brown’s administration isn’t ready to sound the alarm, especially since the last few years have been good ones as investment gains translated into rising revenue.

And Brown and lawmakers have taken steps to shore up the state’s defenses since the recession. They’ve been paying off debt incurred during down years, and stockpiling some revenue from capital gains — one of the least reliable sources of taxpayer money — in a rainy-day fund.

“The governor insisted on putting a good insurance policy in place,” said H.D. Palmer, spokesman for Brown’s Department of Finance.

Still, experts have long decried Sacramento’s dependence on a tax structure they say is dangerously lopsided.

“The state has done nothing to address the source of the problem, which is the tax system,” said Jeff Cummins, a Cal State Fresno political science professor.

One-tenth of the current budget’s $115 billion in general fund revenue is expected to come from capital gains — compared with 2.7% in 2009, during the depth of the recession. And Brown has repeatedly warned about the volatility of state finances, insisting on conservative revenue figures in the budget as a hedge.

Administration officials estimate that a moderate recession could cost the state $40 billion in income over three years, which would quickly wipe out the $3.5 billion that is expected to be in the rainy-day fund by next summer.

But the governor has also resisted efforts to make changes to the tax code, which probably would require making people who earn less money contribute more.

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