This story was originally published by CalMatters. Sign up for their newsletters.
California’s booming stock market is bringing in billions of dollars in unexpected tax revenue.
Proposition 2, or the Save for California’s Future Act, aims to shore up the state’s rainy day fund by allowing state leaders to save up to 20% of the state’s general fund tax revenue, up from the current ceiling of 10%.
The state would also be required to save more when revenue is growing faster, and allow state lawmakers to use some of it to pay down California’s $20 billion in federal unemployment insurance debt.
Supporters say saving more now would help the state weather a future economic downturn.
California has been stuck in a boom-or-bust state budget cycle because its tax revenue depends heavily on wealthy residents’ stock market earnings. Some economists have warned the current economic boom may not last, and the state could face deeper budget uncertainties due to federal budget cuts and potential tax filing delays triggered by natural disasters.
Gov. Gavin Newsom and Democratic legislators spearheaded Prop. 2, which is also endorsed by labor unions, chambers of commerce and a coalition of advocates for healthcare, housing and transit.
“If you don’t have a rainy day fund, then what happens is you get forced to contemplate cuts to core essential services,” said Assembly Budget Chair Jesse Gabriel, an Encino Democrat.
But opponents, including most Republican lawmakers, say saving more would only embolden legislators to spend more. The state should refund taxpayers during a good year, not set the money aside, they argue.
“When they say we’re here for fiscal responsibility, it’s like the devil offering a Bible study. Don’t buy it,” said Assemblymember Carl DeMaio, a San Diego Republican.
California leaders and voters have historically established reserves several times, but always quickly withdrew all the funds during budget crises. In 2014, voters approved a law that required the state to save more aggressively and made it harder to withdraw money.
The law requires the state to set aside 1.5% of its general fund revenue and any spikes in capital gains tax revenue each year for reserves and paying down debts. State lawmakers are allowed to withdraw up to half the balance from the reserves when the governor declares and the Legislature ratifies a budget emergency, unless they’ve already done that the previous year and the emergency remains. There are no limits on what lawmakers can spend the money on.
Prop. 2 would keep those rules and allow the state to save more. Critics say state leaders have too much leeway in spending the money.
David Crane, a former economic adviser to former Republican Gov. Arnold Schwarzenegger, said the rules let “governors bake in spending based on optimistic forecasts, knowing they can always dip into reserves if revenue falls short.”
