08/19/2018

Big Three Items are Eating State Revenues

California’s General Fund tax revenues have grown nearly 50 percent since a tax increase in 2012. But funding for most services has grown at a fraction of that pace. Eg, funding for courts has grown only 12 percent. That’s because tax revenues are increasingly being diverted to (i) pensions, (ii) subsidies for retired employees (“OPEB”), and (iii) enterprises reimbursed by Medi-Cal, the state’s single payer health insurer for 13.5 million residents.

Absent reform, the “Big Three” will consume ever-larger shares of the budget, which will lead to ever-more-frequent calls for tax increases. The pressure has already started. AB 2731 has been introduced in the State Assembly to impose a 17 percent tax on the “carried interest” earned by California investment managers. Pressure will increase even more during the next bear market, which will likely produce ~$60 billion in state deficits. Tax increases are always marketed as beneficial to public services but in California the real reason for now is to cover-up spending on the Big Three.

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