A Dangerous May Revision

We scratched our heads Friday when — despite a steep fall-off in the stock market and a first quarter contraction of the US economy — we learned the May Revision of the Governor’s Proposed Budget expects rosy tax revenues for the 2022-23 fiscal year commencing July 1. After reading the document, we learned how that happened:

Budget summary revenue forecast and mention of stock market decline

In other words, the Revision chose to ignore much of this:

NASDAQ Composite drop 2022 year to date

But not to ignore “recent cash trends,” by which it means tax payments made in 2022 reflecting the prior tax year when the stock market produced large gains. Together the two choices create billions of dollars of excess forecast revenues.

Meanwhile, at the same time as the May Revision was forecasting a rosy future for tax revenues, a venture capitalist we admire was presenting this slide about today’s stock market slide upon which a good deal of those tax revenues rely:

Growth stocks hit the hardest

During the Dot-com Crash, California’s annual tax revenues fell by more than one-third for three years:

Personal income tax (PIT) statistics during dot-com crash of 2000-2003

Should a similar decline take place today, California’s tax revenues would fall by more than $120 billion over three years — many multiples of the state’s reserves. To gain a sense of the destruction to education and other services when forecast revenues are not realized, consult Governor Gray Davis’s proposed budgets for the years following the Dot-com Crash.

While it is appropriate to forecast a cash surplus for the current fiscal year that ends in just 45 days, any forecast of a cash surplus arising from the 365 days commencing July 1 — which the Administration claims will supply nearly $50 billion for additional discretionary spending — is both unreliable and dangerous. California should be reserving all excess revenue it collects in the current fiscal year and not base expenditures for the next fiscal year on rosy revenue forecasts.