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Budget culprit is California tax code, ratings agency says

June 11, 2012 |  9:03 am

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While Gov. Jerry Brown and top Democratic lawmakers haggle over spending cuts this week, Standard & Poor's said Monday that they're missing the core problem leading to California's budget crisis.

The root of the budget morass, the ratings agency said, is the state's tax code. Tax revenue has grown more slowly and become increasingly unreliable, thanks in part to the state's heavy reliance on taxing the wealthy. Standard & Poor's estimated that income taxes on the richest 1% gave the state 11% of its general fund revenues in 2010, up from 2.7% in 1979.

Brown's tax proposal, which he hopes voters approve in November, could make revenue even more unreliable because it would raise the tax rate on wealthy residents, the report said. Still, the ratings agency described it as an "emergency measure of sorts" that may be needed to balance the budget.

Standard & Poor's concerns about the state's tax code echoes those voiced by the legislative analyst's office, which provides nonpartisan budget advice to lawmakers. In its report, the ratings agency painted a bleak picture of a state struggling to reboot its economy after the recession and wrestling with budget problems unique in their size and complexity.

Standard & Poor's also downplayed a central line of criticism from Republicans, saying overspending is not driving the state's problems.

"We don't see the state's existing spending level as the key source of its budget distress," the report said. "In fact, the state is currently spending less as a share of its economy than it has at any point in the past 39 years."

Looming in the background is California's overburdened pension system. Although the problem contributes "little if anything to its current budget predicament," the report said, it could eventually drag down the state's credit rating.

RELATED:

S&P sounds alarm over April tax revenue

S&P upgrades California's financial outlook

California's budget still mired in dysfunction, S&P says

Photo: Large boxes full of already opened and emptied envelopes sit at the Franchise Tax Board in Sacramento. Credit: Laura Morton / For the Los Angeles Times

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