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."

NEXT: Pete Townshend Speaks

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. $”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.”


    the above quote is government-speak for “if it weren’t for that pesky Proposition 13, we wouldn’t be having these problems.”

  2. Davis and his lackeys were no better than those 23-year-old CEOs who bought fleets of BMWs based on their overvalued stock options. Even if there wasn’t going to be a crash (which there pretty obviously was) the capital gains returns would have dropped off when prices stabilized. Yet these jacklegs acted like the money would continue to pour in.

    The fact that Davis got re-elected blows my mind. It just shows you how screwed up this two-party-system thing can get.

  3. California deserves exactly what is happening to it – ridiculous property valuations, tons of home foreclosures and bank failures, rising unemployment, massive state and local budget crises, high energy costs, rolling blackouts, earthquakes, etc etc etc. Unfortunately, what happens in California is often a good indicator of what is about to happen to the rest of the nation in the near future. Except for the earthquakes.

  4. Brad – I agree and yet I don’t. I would say that everyone who voted to re-elect Davis (and his ilk) deserves what he or she is getting… but what about those people who didn’t? Tyranny of the majority and all that.

  5. …and as an afterthought that i had just as i hit “post”… I can’t exactly blame people for voting against the religious right-winger that the Republicans put up against Davis. Hence the two-party system comment I made earlier.

  6. Rich – yes, in a way my heart goes out to the handful of non-Liberals who still call the beautiful state of California home. California is a great place, except that it is full of Californians, who tend to be extremely Liberal, extremely whacked out of their mind, or both. Alas, the only long-term answer for these good non-Liberals may be to find another state to call home.

Please to post comments

Comments are closed.