State Revenues Continue to Bear the Mark of the Great Recession

The budget signed by Governor Brown last month assumes that state revenues will total $137.0 billion in 2013-14. This consists of $97.1 billion in General Fund revenues — the primary source of funding for state services — and $39.9 billion in special fund revenues — proceeds of taxes, licenses, and fees that are designated by law for specific purposes.

These estimates are remarkable for a couple of reasons. First, revenues as a percentage of the California economy in 2013-14 are projected to be roughly equal to the 40-year average, which is 7.5 percent. In other words, as a share of the state’s $1.8 trillion economy — as measured by state personal income — revenues in 2013-14 are expected to come in right around the historical trend line going back to 1974-75. This is notable because California voters approved two tax measures last November — Propositions 30 and 39 that are projected to boost state revenues by about $7 billion in 2013-14. The fact that revenues are expected to be near the historical average in 2013-14 even with the new revenues approved by voters — rather than significantly above that average — highlights the deep hole that the Great Recession and years of tax cuts created in the state’s tax system, which Propositions 30 and 39 helped to fill.

The 2013-14 revenue estimates are also remarkable for a second reason: Total projected revenues — $137.0 billion — are more than $20 billion below the level they likely would have reached if the Great Recession had not occurred, as we explained in a blog post earlier this year. In other words, if California’s economy hadn’t hit a steep downward slide in 2008 and instead had increased to $2.2 trillion by 2013 (as state analysts expected back in 2007), total state revenues likely would exceed $160 billion in 2013-14, based on revenues comprising 7.5 percent of the state’s economy. Instead, California’s smaller-than-expected $1.8 trillion economy is projected to generate less than $140 billion to support state services during the current fiscal year. This $20 billion-plus revenue gap represents dollars that are not available to support state investments in education, child care for working families, transportation, and other public systems and services that promote economic growth and broadly shared prosperity.

Of course, it’s possible that revenues will surpass the level assumed in the 2013-14 budget. For one thing, lawmakers adopted the Governor’s relatively conservative General Fund revenue projection for 2013-14, which was $2.7 billion below the Legislative Analyst’s forecast. For another thing, the state finished 2012-13 — which ended on June 30 — with General Fund revenues running just over $2 billion (2.1 percent) ahead of the Governor’s May Revision forecast. Yet, even if total state revenues in 2013-14 come in a few billion dollars higher than anticipated, that larger amount would still be close to the historical average as a share of California’s economy (7.5 percent) and would remain far below the level that revenues likely would have reached but for the Great Recession.

— Scott Graves