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California faces more budget cuts

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Steve Chiotakis: While Congressional super committee members in Washintgon are looking at trillions in cuts to the federal budget, there are only six days to go to do all that. And a report out this week says the state of California is set to have some big budget problems of its own. Revenue shortages so far this year will force the state to make some tough cuts next year.

Tracy Gordon is an economic studies fellow at the Brookings Institution, and she’s with us now. Hey Tracy.

Tracy Gordon: Good morning, how are you?

Chiotakis: I’m doing well. I thought a lot of folks were spending more money — that consumer spending is up — why is state revenue so sluggish?

Gordon: Well, state revenues really respond with a lag to what’s happening the economy, so a lot of states are seeing lower personal income revenues and sales tax revenues than they were anticipating.

Income taxes, in particular, come in the year after people have reported their gains for the previous year, so some of the growth that we were seeing initially might have had to do with people cashing out gains in the stock market, and those might not have been sustainable.

Chiotakis: How does what’s going on here, Tracy, in California, compare to what’s going on across the country?

Gordon: The best data that we have say that state tax revenues were actually rebounding until recently — the second quarter of this year was looking really good. But again, it wasn’t clear if those gains would be sustained, and in fact, a lot of large states — like California, New York, New Jersey, Florida — are reporting that revenues are coming in below expectations.

Chiotakis: I know Californians are no strangers to budget cuts. I mean, is this worse than we’ve seen? What kind of impact do you think it’s going to have?

Gordon: So California — unlike a lot of states — actually specified where the cuts would be if revenue didn’t come in where they were expecting. So we have a test case now with a trigger that will go into effect, and those cuts are concentrated in education and in health care and social services, where states in general tend to spend most of their money.

That’s also where cuts have already occured in this recession, so this might be the point where we start to see an impact on the quality of services that taxpayers will notice.

Chiotakis: Tracy Gordon, an economics studies fellow at the Brookings Institution. Tracy, thanks.

Gordon: My pleasure.

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