How "Cash for Clunkers" could hide the imminent state budget disaster

California State Controller John Chiang Monday afternoon issued his monthly Statement of General Fund Receipts and Disbursements for July 2009. This Statement did not get much press today though, perhaps because it contained confusing and misleading information.

Despite some cautionary statements, Chiang couldn't help but comment:

While the State’s General Fund Revenue came in below last July, there are signs that California’s economy is feeling for the bottom.

Yeah right. California's most carefully conservative state official finally read the memo - "regardless of the numbers, give it an optimistic spin." Yes, the revenue numbers were higher then previous months compared to the prior year. But....

Chiang, who has been hypercritical of the budget process, carefully points out that as of April the legislature had raised the sales tax rate from 7.25% to 8.25% which is a 14% increase. He also notes that the last week in July was the great "Cash for Clunkers" sales marathon. What he didn't explain is that if you adjust for typical monthly changes, for the rate increase, and for the possibility that extra cars were sold in time to be reported, the sales tax revenue increase was in line with May and June declines between years.

He just had to place the July bump in sales tax revenue in some context by saying "any encouraging signs in the economy were virtually nonexistent six months ago" without adding "and July sales tax revenue number is also not an encouraging sign."

Chiang also noted that personal income tax revenue came in 11.5% lower than in July 2008. He didn't mention the increase in the personal income tax rates this year regarding which a caution appeared in the San Jose Mercury News Sunday:

Johanna Sweaney Salt, a certified public accountant with Kaufman, Schmid, Gray & Salt LLP in Claremont, recommends...workers who do not want to be stuck with an unexpected tax bill next year or one that is higher than anticipated should make sure their employers are withholding enough on their state income taxes. That's because the 0.25 percent personal income tax hike went into effect in the second quarter of 2009 but applies retroactively to January.

In other words, people have increased their withholding and quarterly estimates which is showing up in the 11.5% lower personal income tax revenue. So that revenue is also not an encouraging sign.

And even Chiang won't comment on Corporate Tax revenue changes because of the 20% underpayment penalty that went into effect last October. Corporations are probably overpaying their monthly and quarterly payments.

Chiang office indicated that it has not been able to compare the actual revenue to the revised budget approved just two weeks ago. In fact, his office is struggling with these numbers to determine if it can quit issuing IOU's (Registered Warrents) in payment of the State's bills. One thing is for certain, these numbers are going to be hard to use to project what will happen by October when I expect The Great California Slump to hit another "rough patch."

The real danger lies in the fact that the revised unbalanced General Fund budget may not get the attention it needs until the damage to the State is horrendous. Simply because the "Cash for Clunkers" program resulted in a General Fund revenue bubble for July, members of the Legislature may be further encouraged to ignore the problem "elephant in the room."