That’s likely not good news for most of us. Legislative leaders and the governor still have yet to agree on how to spend (save?) the $100 billion of revenues gushing into Sacramento above projections. They’re debating a variety of ways to send money back to residents to help with the soaring inflation and even more rapidly soaring energy prices. California pays the highest gasoline/diesel prices in the country as well as the highest electric rates thanks to the green initiatives imposed by Sacramento and the Biden Administration.
Economist Christopher Thornberg, who has compiled economic forecasts for the state and the East Bay for decades (East Bay Economic Development Alliance), has a simple directive: save it. He’s the founder of Beacon Economics and directs the Center for Economic Development and Forecasting at UC Riverside.
In an opinion piece published Monday by CalMatters, Thornberg, who called the housing bubble, points out just how fragile these seemingly good times are for Sacramento. He frames the debate between the Democrats (Republicans are irrelevant in Sacramento thanks to the Democrat super-majorities) about whether to expand social programs or to spend the money on capital projects and other one-time expenditures.
California’s taxation is based on extremely high extractions for wealthy people. As long as they’re doing well with companies going public, growing investments and general economic growth, the state does well.
Thornberg points out the temporary surplus is driven by the personal income taxes that typically make up 25% of revenue. Next year, it’s predicted to be two-thirds—screams abberation.
“Over the last two years, state income from capital gains taxes has been close to $250 billion, twice as high as ever before and four times the average. A record surplus is no surprise,” he wrote. “The last two periods of high capital gains occurred in the late 1990s and then again when the dot-com and subprime mortgage bubbles overheated the economy.
“When those markets crashed, so too did asset values and, of course, capital gains. Huge budget surpluses were followed by huge budget deficits. “
The times already are changing.
Did you see Wall Street enter recession territory Monday as a major selloff continues? That won’t mean investment gains—the market is now back to the level where it was when Biden was sworn in.
“The last two years might be best characterized as the “stimulus bubble era.” Yes, the pandemic was a tragic natural disaster, but it was a completely different kind of recession with few long-term consequences. A bit of economic help would have served the purpose fine, but instead, in today’s era of populist politics, the stimulus firehose was turned on. The $12 trillion in what was largely unnecessary federal stimulus has set the U.S. economy on fire.
“This is what is driving soaring federal as well as state tax revenues. But it can’t last,” he wrote.
His bottom line is to prepare for tough times. His view, incidentially, coincides exactly what with our personal financial planner said when we spoke with him last week.
