Panic in Sacramento

Official Sacramento’s reaction to news of a possible $1-billion income-tax shortfall has been typical: shock, surprise and panic followed by recrimination and attempts to fix political blame. But if the Legislature and Gov. George Deukmejian--particularly the governor--had played the tax game a bit more prudently, there would be no need for any of the above.

Still, there is no call for panic, particularly if that leads to crash cuts in a budget that already is penny-wise and pound-foolish. Compared with estimated general revenues of more than $36 billion in the budget year starting July 1, a $1-billion drop amounts to less than 3%. A carry-over surplus of more than $500 million was estimated in the governor’s new budget, growing to more than $1 billion in the coming year--to be set aside in an emergency reserve.

The early assumptions have been that the shortfall might have been caused by tax effects of the stock market crash last fall and/or bad computation of the effect of federal and state tax reforms. The deficiency was discovered after a survey of tax returns that poured into the state Franchise Tax Board at the April 15 deadline. But Chairman Johan Klehs (D-San Leandro) of the Assembly Revenue and Taxation Committee said that payroll-withholding figures during the 1987 tax year did not indicate that anything was amiss. The deficiency could get even bigger when bank and corporation tax returns are compiled because of a slight cut in that rate, Klehs added.

Both Klehs and his Senate counterpart, John Garamendi (D-Walnut Grove), had cautioned against making last year’s $1.1-billion tax rebate until fiscal experts could determine the ongoing impact of state and federal tax reform. Deukmejian, of course, demanded immediate return of the surplus to the taxpayers even though the Gann state spending limit did not require it for at least another year, and probably not even then.

Many experts had warned of the potential for great volatility in tax receipts this year because of the law changes. In her February budget report, Legislative Analyst Elizabeth G. Hill said the governor’s revenue estimates “are subject to a much-larger-than-normal margin of error.”

If a glitch in state tax reform caused the deficiency, the law should be corrected as soon as possible so the revenue losses can be stopped. In the meantime, the Legislature should resist any extreme budget cuts to offset the shortfall. The governor’s budget reserve is there to handle just this sort of surprise.