For two decades, California’s governors and legislators – as well as lobbyists from countless groups with influence over the state budget – have been engaged in an ongoing debate about the increasing volatility of tax revenues.

As sources of revenue grew, income taxes became the most important source of revenue. Half of these taxes came from the state’s highest-income taxpayers, mainly from the profits on their investments, which can fluctuate greatly from year to year.

In addition, as revenues became less predictable, government spending became less flexible. For example, in 1988, a ballot measure, Proposition 98, required about 40 percent of state revenues to be spent on public schools and community colleges.

When state revenues dropped dramatically during the Great Recession and the state faced a historically high budget deficit, then-Governor Arnold Schwarzenegger and legislative leaders formed a commission to propose solutions to revenue volatility.

The Commission debated for months but was hopelessly divided on whether to reform the tax system and de-emphasize income taxes or to increase budget reserves to cushion periodic revenue declines. Its report, which favored the first approach, was promptly shelved and largely forgotten.

A few years later, Schwarzenegger’s successor, Democrat Jerry Brown, faced persistent deficits resulting from the sharp revenue declines of the Great Recession. He filled the gaps with a temporary tax increase that voters approved in 2012, focusing on income taxes on the wealthy, and proposed a “nest egg” to mitigate the impact of future revenue declines.

Voters approved this approach in 2014, and the reserve, along with other smaller special-purpose reserve funds, amassed substantial balances of about $30 billion over the next half-decade.

Governor Gavin Newsom dipped into reserves a little in 2020 to offset a drop in revenue during the Covid-19 pandemic, and when he and the Legislature faced a nearly $50 billion budget deficit this year, they dipped into them again.

Newsom had originally proposed drawing $13.1 billion from the reserves, but the final 2024-25 budget approved in June took only $5.1 billion from the emergency fund and calls for another $7.1 billion draw in 2025-26. It also largely depletes two other reserves, including one for schools.

This year’s deficit is not due to an economic downturn, but because the Newsom administration massively overestimated revenues for 2022. Some critics also complain that the government’s misuse of reserves may leave it unable to handle a recession this year.

The heated debate over budgets, reserves and revenue volatility resumed this week during a hearing of the National Assembly’s Budget Committee – specifically on the question of whether the state needs a larger emergency fund.

Newsom, whose forecast of a huge budget surplus due to explosive revenue gains in 2022 turned out to be completely wrong, now wants the state to only release estimates of unexpected revenue once it is actually in the bank – a precautionary measure that should have been taken many years ago.

But his proposal to increase the rainy day reserve has faced resistance from groups that believe the state should spend more to help poor Californians rather than setting aside more money.

Scott Graves of the left-leaning California Budget & Policy Center warned lawmakers that “significantly raising the emergency fund cap could tip the balance too far toward savings, leaving less revenue to meet Californians’ immediate needs. This would make it harder to fight poverty and inequality and create an equitable California where everyone can share in the state’s prosperity.”

The hearing essentially sets the stage for a possible 2026 vote to overhaul the state’s budget reserve, but it could also revisit the revenue aspect of the eternal debate, as the last extension of Jerry Brown’s 2012 income tax hike expires in 2030.