The California Comeback

In the last few days, Texas Governor Rick Perry has been touting the benefits of living in Texas (as opposed to California).   Perry ran for President, although not very credibly.  But in the $24K he spent on ads in California radio markets he says that Texas is a lot more friendly to business than California.   His ad campaign gave me pause for a couple of reasons.

First, I've been to Texas and while I agree that it has a better business climate, much of the state is not a place I would want to be (even with the California propensity to regulate and to tax).

But Second, and even more important, as California Common Sense has pointed out, is our ability to forecast revenues which ain't that hot.   California Common Sense is an interesting group.  It is a Stanford based nonprofit that is trying to improve the data about California government.  Since they were formed they have had a couple of very interesting short issue briefs on a variety of subjects.

One of the more recent ones dealt with how really lousy the revenue estimates from the Department of Finance have been.  Consider this interesting fact - since 1997-98 the professional forecasters have been within a 2% margin of error for their January estimates (the ones used to estimate the original budget) only twice. Let me reiterate that with emphasis - in more than a decade of tries our paid professionals who think about how much money we will gain from taxes have been within a pretty small margin of error ONLY TWICE!  One would expect that a 2% margin of error would be a pretty low bar to pass..  But in six of those years they were close to 10% off (either too optimistic or too pessimistic).   That kind of record could probably be obtained by using a group of chimps from the San Diego Zoo.

Admittedly, revenue forecasting is a tough business.   But the record of the Department of Finance is laughable.  So here is a chart from their report on revenue estimating.  It sort of looks like a set of random guesses.

What can you conclude about these substantial forecasting errors.   I think there are three things.  First, revenue estimating is like a lot of other economic forecasting tasks - very tough.  Even with that caveat, the DOF estimators are not particularly skilled at figuring out how much dough the state will have in the coming fiscal year.   Second, a good deal of the problem has been created by the increasing reliance of the state on highly volatile sources of revenue - i.e. the more you rely on  the income tax to fund activities, the less able you will be to estimate actual revenues.    Finally,  part of the reason that this task is so hard is that income is a highly discretionary concept.   People at the highest ranges of income are able to time their receipt of income more than the normal wage earner.   By raising rates on the highest income earners, one would expect that volatility would increase even more.   Even without that variable, the point that Governor Perry offers is that California, through its bizarre regulatory and tax climate is becoming less and less receptive to entrepreneurs.   The Governor (ours not Perry) sniffed today that Governor Perry was off base in making the commercials - maybe he was.   But the point about the stifling nature of our tax and regulatory environment cannot be ignored.