California’s Fiscal Cliff

May 15, 2012

As fiscal year 2012 continues, many states are reporting increased revenues that help to reduce deficits and debt accumulated during the recession, but not California. The Golden State saw a 20.2 percent decrease in revenue, about $2.44 billion, and spent more than $2.1 billion than originally estimated so far for fiscal year 2012. Needless to say, the lack of revenue and increase in spending ballooned the state’s deficits.

Now $16 billion –instead of the $9 billion predicted in January—California’s deficit poses major problems for the state. While borrowing has yet to be impeded by a lack of confidence in the state’s ability to pay off its debt, the massive deficit means lawmakers must make more cuts than originally planned to control the growing debt. The problem is that California’s Governor Jerry Brown would rather increase taxes and cut less than needed to bring the deficit down.

In November a ballot initiative will determine if the state will raise sales taxes a quarter of a point, up to 7.5 percent, and raise the marginal income tax on the rich to 13.3 percent from the already-high 10 percent. Ranking dead last in The Chief Executive’s ranking of business-friendly states, it is unlikely that the new taxes in November will encourage more business to locate in California.

While the tax increases stand to raise $9 billion in the upcoming budget year, this still leaves the state $7 billion in debt. If it were not obvious before that California was not in aposition to tax its way out of this mess, the shortfall after raising taxesshould make it very apparent. The only real solution for California is the same solution for spending in Congress: cut spending and implement a plan for long-term deficit and debt reduction. Until a plan is put in place to keep deficits from reaching this size again, California can increase its taxes all it wants and still not find its way out of debt.

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