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California budget surplus turns into shortfall

California Gov. Jerry Brown discusses the state budget and a ballot measure to raise taxes following his State of the State speech in Sacramento on Jan. 18, 2012 in Los Angeles, Calif.

Adriene Hill: These are tough days for state budget makers. The Center on Budget and Policy Priorities says nearly 29 states faced budget shortfalls for fiscal year 2013. Among the most indebted: California. The state had hoped an improving economy would boost taxes, but it hasn't worked out that way.

From station KPCC, Julie Small reports.


Julie Small: California relies heavily on income tax from the state's wealthiest people.

HD Palmer is with the California Department of Finance. He says returns from 2010's show that about 1 percent of California's top earners generated nearly half of the income tax the state collected.

HD Palmer: The behavior of a very small sliver of taxpayers can have a significant effect on general fund revenues.

The changing fortunes of that top bracket can add or eliminate billions of dollars of state revenue in a single year. Mac Taylor, analyzes fiscal policy for California's legislature.

Mac Taylor: We can't forecast taxpayer behavior. No one's particularly, you know, good at that.

If markets are up, wealthy taxpayers may sell more stocks and pay more capital gains tax; if market's are down, taxpayers may postpone stock sales. Nobody knows. How taxpayers feel also affects how much they pay in estimated quarterly tax.

California's Controller John Chiang says if taxpayers feel optimistic, they tend to pay more.

John Chiang: And if people don't feel comfortable, if they think things may head south with the stock market, they may not pay as much in estimate tax.

This year, state number crunchers guessed wrong.

I'm Julie Small for Marketplace.

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