Specifically, Governor Brown has suggested a reform measure that would level out capital-gains receipts, which are a very large source of revenue for the state. Capital-gains revenues are volatile everywhere, but especially so in California, where everything from Silicon Valley IPOs to a goofy real-estate market makes capital gains a feast-or-famine proposition. In 2006, when the first of the Google insiders began cashing out their shares following the company’s initial public offering, California’s 9.3 percent capital-gains tax produced almost $10 billion in revenue — but it produced only $3 billion just a few years later.
Rather than ride this revenue rollercoaster, Governor Brown proposes to calculate a running average of capital-gains receipts trailing back several years. In particularly fat years, any capital-gains revenue over the average would be used to pay down debt rather than being made available for general spending. The proposal has twin virtues: The first is that it introduces an element of predictability into the revenue side of the equation, and the second — and more important — is that it acts as a brake on spending, since boom-year surpluses are diverted away from political enthusiasms that permanently raise the spending baseline.
The proposal is an excellent one, and one that the federal government would have done well to adopt back during the dot-com boom. That’s because our national fiscal dynamic works a great deal like California’s: In the good years, we act like the boom will go on forever, raising spending and cutting taxes; in the bad years, we declare an economic emergency, raising spending and cutting taxes. If George W. Bush et al. had fought for that policy in 2001 instead of temporary tax cuts, the country would be in appreciably better fiscal shape than it is today.