California Gap Created by ‘Dysfunctional’ Tax System, S&P Says

California’s $15.7 billion deficit is the result of a “dysfunctional” tax structure that hasn’t kept up with changes in the state’s economy, according to Standard & Poor’s.

The state’s spending as a share of personal income is at its lowest since 1973, S&P said in a report today.

Personal-income-tax collections account for a larger portion of the budget than sales tax, the ratings company said. The former makes up 63 percent of general-fund revenue in Governor Jerry Brown’s fiscal 2013 budget proposal, compared with 51.5 percent in 2010, Gabriel Petek, an S&P analyst, said in the report. Meanwhile, the state’s sales tax applies only to consumer goods and not services.

During the past several decades, “California’s economy evolved to one more heavily based on services rather than retail sales,” Petek said in the report. “But the overall system of taxation has remained largely unchanged.”

Growth in California’s tax revenue has also slowed, S&P said. The collections grew at a 1.2 percent average rate since 2000, compared with 8.24 percent yearly when expanding the horizon to 1950.

To contact the reporters on this story: Michelle Kaske in New York at mkaske@bloomberg.net; Steven Fromm at sfromm@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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