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5/20/02

Gray Davis Admits His Fiscal Mismanagement
Led To California Budget Shortfall
Now Wants To Raise Taxes On Working Families To Bail Out His Mistakes

WASHINGTON - In a shocking announcement Tuesday, California Governor Gray Davis admitted his fiscal mismanagement and ignorance produced an unprecedented $24 billion budget deficit. To bail out his own fiscal mismanagement, the Governor is now proposing to raise taxes on California residents.

The Governor blamed declining capital gains revenue and stock options as the source of the budget problems. However, Governor Davis continually relied upon this unstable, volatile, and temporary, revenue source to fund permanent programs. The Governor's irresponsible fiscal policy violated nearly every rule of basic public finance.

Revenue from capital gains taxes is highly volatile and unstable because it is closely associated with year-to-year fluctuations in the stock market. During the previous stock market boom, capital gains and stock options revenue in California increased 530% percent. This revenue was treated by Gray Davis as a permanent increase in the tax base, and was used to fund permanent programs.

But when the economy slowed and stock prices fell, capital gains revenue declined significantly. The Governor even admitted the slowdown of the stock market accounted for $19 of the $24 billion shortfall. As a result, the Governor's irresponsible massive spending increases of unstable and temporary capital gains revenue is nearly the sole cause of the state's budget deficit. Now, the Governor want to increase taxes in other areas to pay for spending he previously committed taxpayers to.

"Governor Davis is attempting to balance the state budget on the backs of California taxpayers despite the fact that his Administration is responsible for the budget bleeding with red ink," said taxpayer advocate Grover Norquist, who heads Americans for Tax Reform in Washington. "Basic common sense indicates capital gains taxes are not only bad tax policy, but extremely poor budgetary policy as well," "When the bubble bursts, all taxpayers have to pay."

Even worse than the Governor's incompetent management of state finances, is his pure ignorance of the slowdown of capital gains revenue. The Governor claimed that he was surprised by the rapid deceleration of the economy and stock market. However, capital gains revenue is closely correlated with the stock market and the stock market has been in decline for nearly two years. American households lost an estimated $4.5 trillion of net worth since the slowdown in the stock market.