State $1.9 Billion in the Red as $1 Billion in "Unreal" money evaporates

The First cap-and-trade auction was a bust for California's budget falling short $400 million from projections.  This is followed by the lower-than-expected IPO value of Facebook which produced $626 million less than projected for state coffers.  Even though these illusionary dollars have disappeared, Sacramento lawmakers are already budgeting to spend the projected revenue on pet projects. Even with the revenue is not coming in, State environmental leaders this week hailed California's first auction of carbon emissions credits a huge success.

The auction proceeds already face a legal challenge. The California Chamber of Commerce filed suit this month alleging that ARB has no authority to sell emissions credits to raise state revenue. The business group contends the money is either an invalid tax or unconstitutional fee.

    Richard Rider, Flash Report, "First CA 'cap-and-trade' auction a dismal failure"

This “disappointing” auction result is a classic demonstration of the law of supply and demand.  Many businesses have little use for such CA “pollution” credits if they are leaving the state — or at least have no plans to further expand in the state.

On the supply side, doubtless a number of businesses will want to sell their existing CA pollution credits ASAP, as they will have zero use for such a pollution license if/when they leave the Golden State.

California's nonpartisan Legislative Analyst's Office estimated Wednesday that if demand remains similar in two forthcoming auctions, the state would generate only about $140 million.  That is a a mere fraction of the $1 billion that Gov. Jerry Brown and lawmakers estimated the state would receive this fiscal year.

    Kevin Yamamura, Sac Bee, "First cap-and-trade auction a bust for California budget"

As California sells credits, it stands to benefit financially. Brown and lawmakers assumed California would take in $1 billion total this year, spending $500 million on state budget relief and $500 million on curbing greenhouse gas emissions.

The California Air Resources Board sold $289 million in credits this month, but most of the money is dedicated for utilities and their ratepayers. That leaves $55.8 million for the state.

Had ARB sold all of its 2015 credits rather than just 14 percent of them, it would have raised nearly $400 million for the state this month.

According to State estimates, the record-setting Facebook IPO would have made a windfall of some $2.1 billion dollars for California.  "The IPO will result in a market capitalization approaching or even exceeding $100 billion and well over $10 billion of income will be generated for California residents," the LAO added.

State leaders erred on the prediction when they assumed Facebook shares would trade at $35 this fall. The stock has traded below $25 since August, and the analyst estimates that California will see $626 million less than expected as a result.

California has repeatedly overestimated revenue inflows during difficult economic times. Since the 1981-82 fiscal year, the state’s budget experts have hardly ever gotten it right.

During the economic boom of 1994-2000, California’s capital gains income rose from $28 billion to $165 billion. Then the tech bubble burst, and capital gains fell to $68 billion in 2002.

The housing bubble followed, and capital gains income shot back up to $153 billion in 2007. That bubble burst, and back into the tank the state went; capital gains income plummeted to $56 billion in 2009. That cost the state $9 billion in tax revenue in 2008 and 2009.

The LAO said last week the state faces a lingering $1.9 billion deficit, partly because of less Facebook and cap-and-trade money.

The Legislature tried to make up for the losses by raising income and sales taxes in 2009. Now, with the Facebook's IPO failing to produce the expected capital gains tax revenue and with the cap-and-trade auction selling only 14% of the credits officials were hoping for, most politicians across the state, including Gov. Jerry Brown, are supporting the proposition to raise tax rates even more.