Taxing Problem

Economists in California—where the state income tax generates nearly half of the money for the general fund—have discovered the shocking news that revenue fluctuates wildly along with the stock market.

When the tax returns arrived a year after the stock market peaked in early 2000, income tax receipts reached a record high of almost $45 billion. The state surplus grew to heights never seen before.

Lawmakers of both political parties joined [Gov. Gray] Davis in spending billions of dollars in unanticipated tax receipts during his first two years in office.

Despite warnings from budget writers that the Wall Street boom might not last forever, Sacramento's politicians kept spending at a record pace.

As stock prices fell, so did the state's income tax receipts, dropping to $33 billion in two years.

The drop was even more pronounced in the state's take from income taxes on stock options and capital gains on the sale of stock. From a peak just shy of $17 billion in 2000, the state's income from stock options and capital gains fell to $4.6 billion, a precipitous decline that cost $12.4 billion in lost tax revenue.

The lesson was there for all who were willing to learn it: "If you live by the stock market, you die by the stock market," [chief state economist Ted] Gibson said. "It's a volatile and unpredictable beast."