California's nonpartisan budget analyst on Wednesday gave a more sobering projection of tax revenue than the one in Gov. Jerry Brown's spending plan for the coming fiscal year, mostly because of a more conservative forecast of income and capital gains taxes from the wealthiest residents.
That could mean more spending cuts, tax increases, borrowing or a combination.
"If our current revenue estimates are closer to the target than the administration's, the Legislature will have to pursue billions of dollars more in budget-balancing solutions," the Legislative Analyst's Office said in its overview of Brown's proposed $92.6 billion general fund budget for the 2012-13 fiscal year.
The main disagreement is over how much will be brought in from the wealthiest Californians. The top 1 percent of income earners pay about 40 percent of income taxes, which the analyst says is the dominant source for the state's general fund.
Brown wants voters to raise their income taxes this November, along with increasing the statewide sales tax.
The difference in overall revenue between the governor's estimate and the analyst's is $3.2 billion, mostly in income taxes. The analyst's report assumes that the wealthiest Californians will receive "significantly less income" in 2012 than the estimate provided by the governor's finance department.
The income is projected to be lower in all areas, including salaries, business income, retirement income and capital gains, which the analyst described as "extremely volatile."
Revenue from capital gains taxes has been a huge boost to California's general fund during boom times, such as when shares of Apple or Google soar. Tax gains from an initial public offering for Facebook, based in Silicon Valley, could provide another windfall to California's budget this year, but Legislative Analyst Mac Taylor said even that would not be enough to close the budget deficit, estimated at $9.2 billion through June 2013.
Overall, his office's analysis expects $62 billion in capital gains for California tax filers in 2012, $34 billion less than the amount estimated by the Brown administration.
Taylor told reporters that his analysis was like waving a "cautionary yellow flag" to lawmakers about Brown's optimistic revenue projections that he said make governor's budget risky.
"What we're concerned with is the capital gains assumptions is a little bit optimistic," Taylor said.
If the analyst's estimate holds, it would be the second year in a row that Brown's office produced a budget plan that relied on overly optimistic revenue assumptions. The state had to enact $1 billion in budget cuts this month because tax revenue was trailing Brown's estimate from last summer by $2.2 billion.
"The Legislative Analyst's Office report underscores the fundamental uncertainty of our time and, therefore, the financial imperative to be prudent, make the tough cuts now and give the voters a choice on additional revenues," the governor said in a statement Wednesday.
Ana Matosantos, the governor's finance director, said she remained confident in the state's revenue projections.
"We and the analyst's office have different estimates of exactly how fast income for these earners will increase," Matosantos said. "While some have commented that our revenues are too low and others have said they are too high, we believe they are just right."
Brown proposed $92.6 billion in general fund spending for the fiscal year that begins July 1, a $7 billion increase over the current year. Even with that increase, California still faces a structural deficit -- the gap between the amount of its ongoing spending contributions and the tax revenue coming to the state.
Brown estimated that deficit at $9.2 billion in the 2012-13 fiscal year. His plan calls for closing that shortfall with a near equal balance of spending cuts and the temporary tax increases he wants voters to approve in November.
The governor's proposed ballot initiative calls for a half-cent increase in the state sales tax to 7.75 percent, and higher income taxes on those making $250,000 a year or more. The tax hikes would expire in 2017.
If voters reject the tax increases, Brown is calling for an additional cut of $5.4 billion to be enacted immediately after the election, with nearly all of that coming from public schools and leading to the potential that the school year could be shortened by three weeks.
Brown's administration and the legislative analyst disagree on the amount the tax increases would raise if voters approve them. The governor's estimate is $6.9 billion a year, but the analyst said the figure is closer to $4.8 billion based on a more conservative estimate of the higher income taxes on the wealthy.
If the analyst's estimate proves accurate, the Legislature likely would have to cut even more.
The $4.2 billion of cuts in Brown's budget proposal hits an array of state services, including welfare, Medi-Cal, public schools, child care and in-home services for the disabled. The governor said the cuts to social service programs mean recipients will have the same amount of money in real terms as they did during the 1980s.
The governor wants the Legislature to start making the cuts soon, but Democratic lawmakers say they are inclined to wait until Brown releases his revised budget in May to get a truer picture of California's tax revenue.
The analysis released Wednesday praised Brown's general approach to budgeting: a combination of tax increases and spending cuts combined with additional cuts to be enacted automatically if voters reject higher taxes in November.
"If the state chooses either of the governor's two paths, the state budget would be moved much closer to balance over the next several years," the report said.