The following chart is from the California Legislative Analyst’s Office (LAO) and is indicative of the state government’s unstable revenue base. The government receives a higher proportion of its revenue from personal income taxes than most states, which is also greatly affected by capital gains taxes during boom-bust cycles. The lesson is not to program expenditures based on these bubble revenues. The Clinton Administration clearly understood this. Governor Gray Davis did not and paid dearly.
(click here if chart is not observable)
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Governments should behave more like endowments, and spend a fixed amount (conservatively calculated) of their cyclical revenues. Excess goes into a rainy day fund.
David, You are spot on! In our earlier life as economists at the World Bank, we help Chile set-up their copper stabilization fund in early mid-1980’s. Thanks for your comments.