NOT long ago, California’s finances were a mess. The state’s tax revenues tanked during the recession of 2008-09. At one point in 2009 it ran out of money completely, prompting it start issuing IOUs and to force employees to take unpaid leave. Revenues have grown only slowly since. But in California, as in every state except Vermont, the law requires a balanced budget. As a result, from 2008 to 2012, politicians slashed spending. So it was testament to the state’s fiscal turnaround when on June 27th Jerry Brown, California’s fiscally hawkish governor, signed a budget without finding the need to veto any item of spending—the first time a governor has held fire on a budget since 1982.

The economic recovery has, for now, filled California’s coffers. Lawmakers are relaxing constraints on welfare spending and have even found some new money for infrastructure. But the Treasury’s long-term health remains uncertain. For that, thank the state’s oddball tax system.

Gag me with a boon

Two things stand out about taxes in California. The first is their progressivity. The top rate of state income tax, levied on incomes...Continue reading