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(Note:This is a long wonky post that has tremendous implications for local government)
 In trying to follow local politics here in Orange County, I've been looking very closely at local government budgets, and there' s one trend that seems to be emerging rapidly. We're seeing a precipitous decline in local sales tax revenue. And this is not going to be a temporary problem, but rather one with serious long term impacts.
I was absolutely floored by OCTA's fiscal review that showed a difference over three years, in the projection of revenue from sales tax, that lowered the 2009-2010 projection of sales tax countywide by 19% over their previous projections. (This was a difference between projections, not between actuals, but both current and previous projections were based on solid actual numbers and best case projections).
The decline in sales tax has two components, and one will not recover. What nobody seems to be picking up is the relationship between the mortgage bubble and the collapse in California sales tax.
Calculated Risk has consistently posted graphs and reports that show Mortgage Equity Withdrawal (people taking money out of their houses) as a percentage of disposable income. If you read the Irvine Housing Blog, you'll see example after example of folks who used their house as an additional income from 2000 to 2007, turning debt into tax-free income, frequently in the range of 50,000 a year. The phenomenon peaked in Q4 2006 when MEW was nine (9)% of disposable income nationwide, and 6% of consumer spending. A year later, it had only dropped by around 20%. Now it's essentially cut off because no one will fund the loans anymore, and no one will even fund the credit card debt that was routinely paid off with visits to the house ATM machine.
Because Orange County in particular, and California, in general, have housing prices so much higher than the national average, and because we were at ground zero for the origination of the new mortgage products, my guess is that mortgage equity extraction in the OC may have been as much as twice the national average as a percent of disposable income, meaning that up to 18% of the county's disposable income, and 12% of the taxable sales, were coming from MEW.
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