One of these recessions is not like the others

In the winter of 2001, the Silicon Valley dot-com bubble burst, eviscerating a raft of promising online ventures like Pets.com, but also dragging California’s tax revenues down with it. 

Seven years later came another crash — a big one. The credit-fueled housing bubble popped and Wall Street, which had spent years raking in paper profits off of the IOUs, went to pieces. Once again California’s state finances, dependent as they are on the good fortunes of the investor class, went to pieces along it. 

But this economic catastrophe is different. The collapse of the service sector has devastated low-wage workers and many small businesses. But record-low interest rates, a raft of stimulus checks and a surging do-everything-from-home tech economy has been great news for the stock market on the whole. And that’s meant a surprisingly good tax haul for the state of California. 

The chart above tells the story. The two prior recessions are easy enough to see: vertiginous drops in state revenue off the sale of stocks and other investments. But in 2020, the good times just never let up on Wall Street. Nor at  the state tax collector’s office, which derives the lion’s share of its takings from the One Percent.

For what it’s worth, the state Department of Finance expects the party to stop eventually. The governor’s preliminary budget proposal from January projects declines in the state’s share of investor profits from 2022 through 2025. But the state’s forecasters have been unrealistically pessimistic about the state’s fiscal prospects so far.