SACRAMENTO -- The ray of sunshine on the Golden State's slowly recovering economy could turn to gloom if Congress and President Barack Obama are unable to avert the so-called fiscal cliff, and taxpayers could end up paying the price.
Unless a deal is struck, the state's first projected budget surpluses in a decade could vanish into an $11 billion deficit triggered by a national recession, the state's nonpartisan Legislative Analyst's Office said in its annual fiscal outlook.
Like states around the country, California would be forced to contend with across-the-board federal tax rate hikes and massive spending cuts, dampening the state's economic rebound.
"There is great uncertainty surrounding the federal 'fiscal cliff,'" the Legislative Analyst's Office forecast warned in a largely overlooked part of its analysis, released last week. "These policies, left unchanged, would have a significant effect on the economy and could result in economic conditions differing materially from our forecast."
Republicans, who control the U.S. House of Representatives, and Obama have signaled they are both willing to compromise on a deal that averts fiscal catastrophe, though both sides appear fastened to their positions on whether the Bush-era income taxes should rise back to Clinton-era levels on the wealthy.
If the two sides don't come to an agreement by Dec. 31, millions of Californians -- potentially 90 percent of the population, the Legislative
Voter approval of Proposition 30, the measure to raise sales taxes by a quarter cent and income taxes on the wealthy, has had a stabilizing effect on the budget with surpluses projected to begin in 2013-14. But a national economic decline would create a huge new deficit that year instead, and California would be helpless to counter its effects, the analysis states.
Even now, just the prospect of the country going over the fiscal cliff has had a stalling effect on California's economy, said Jeff Michael, an economist for the University of Pacific's Business Forecasting Center.
"The fiscal cliff is probably the largest source of macroeconomic uncertainty going into 2013 when it comes to the state budget," Michael said. And with more than half of the general fund reliant on a steeply progressive income tax and highly volatile capital gains, huge swings in the economy "can have an outsize shift on the budget."
The biggest impact of a fiscal cliff on California would be tourism and consumer spending, the two big drivers of the recovery, said Jordan Levine, the director of economic research at Los Angeles-based Beacon Economics.
"Rising income taxes would take the wind out of the sails in tourism and consumer spending," Levine said.
Levine and others, however, point out that the fiscal cliff is less steep than many have made it out to be -- "more a hill than a cliff," Levine said. Even if they don't come to an agreement by the end of the year, Congress and the president would have as many as three months to retroactively reverse the tax increases before people would feel any significant effects.
"It's not going to happen on Jan. 2," Levine said. "It would take awhile to translate that into a deep recession. We could get into February and March. If it gets to April with no deal, then we'll be in real trouble. But there's a little more time to address this than maybe we've been led to believe."
Still, the threat is real enough to force both parties out of their partisan corners before the end of the year. Some of the results:
Domestic and defense-related spending cuts would hit California hard, as well. And the extension of emergency unemployment insurance benefits would expire at the end of the year. The California Employment Development Department plans to issue warning letters to those receiving unemployment insurance that the federal extension of unemployment benefits will run out if a deal is not struck.
While the uncertainty hovering over the potential fiscal cliff has hindered economic growth, a quick agreement could do the reverse: cheer consumers and businesses, "encouraging them to spend, invest and hire even more in the short term than we are projecting," the report said.