Legislative Democrats release new budget proposal
Analysis from CSBA's Governmental Relations Department
Published: August 5, 2010
Assembly and Senate Democratic leaders released a new budget proposal Tuesday that they say would solve the state's $17.9 billion budget hole and leave a $535 million reserve. The overall numbers are as follows:
- expenditure reductions: $8.3 billion
- federal funds: $4.1 billion
- updated LAO revenue forecast: $1.4 billion
- delayed corporate tax breaks, oil severance tax, tax reform package: $4.5 billion
- tax enforcement measures: $0.2 billion
- Proposition 98 adjustment: –$3.2 billion
- adjusted revenues dedicated to public safety restructuring: –$0.5 billion
- alternative funding: $1.0 billion
- fund shifts, other: $2.7 billion
The solutions total $18.5 billion, which leaves $535 million in reserve.
Prop. 98 and K-12 funding
The Democratic plan rejects the major K-12 cuts proposed by Gov. Arnold Schwarzenegger in the May Revision by making the following restorations:
- $1.5 billion for revenue limits
- $300 million for K-3 class size reduction
- $230 million to reject the negative COLA
With these restorations, the Democratic budget would be about $340 per ADA (unit of Average Daily Attendance) higher than the budget proposed by the governor. As a result, per ADA funding in 2010-11 would be about the same as it was in 2009-10.
The Democratic plan also rejects the governor's proposal to eliminate CalWORKS-related child care funding. The governor's proposal to eliminate child care included a corresponding proposal to reduce the Proposition 98 base by the amount of the child care reduction. The Legislative Analyst's Office and others characterized this proposal as legally questionable. By rejecting the child care cut, the Democratic plan also rejects the corresponding cut to the Proposition 98 base. The total cost of restoring child care is $1.4 billion, of which all but $286 million comes from the restored Proposition 98 base.
This means that total Proposition 98 funding (K-12 plus child care) is about $3.4 billion higher than proposed by the governor in the May Revision. But even this higher level of Proposition 98 funding is $3.2 billion below the minimum guarantee, which would grow if the proposed revenue increases are adopted. Therefore, the Democratic plan includes a suspension of Proposition 98, even while it contains a Proposition 98 funding increase. (This explains the negative Proposition 98 adjustment in the above list of solutions.) Suspension would result in $3.2 billion being added to the Maintenance Factor, which would be restored over time as economic conditions improve.
The Democratic plan also provides additional one-time funding to pay for the backlog of unfunded mandates. Mandates would be paid through a statewide Joint Powers Authority, which would be modeled after a JPA established last year to accelerate the $2 billion in Proposition 1A suspension repayments. It is estimated that this proposal would result in a minimum of $1.3 billion ($220 per ADA) for mandate reimbursement in 2010-11. Because these payments would be reimbursements for costs already paid by school districts and county offices of education, this would be unrestricted revenue for local educational agencies.
The tax reform package
The tax reform package combines an increase in federally deductible taxes (personal income taxes and the vehicle license fee) with a reduction in the state sales tax, which is not deductible. The net result is that federal tax payments would be reduced, state revenue would increase, and individual taxpayers from all income groups—after deductions—would experience an overall tax reduction.
The proposal estimates that revenue from the personal income tax would increase by $8.7 billion and revenue from the increased vehicle license fee would increase by $1.5 billion. These increases would be offset by a reduction of $8.4 billion from the lower sales tax. The deductibility of the higher income taxes and license fees would generate further taxpayer savings. The Franchise Tax Board estimates that individual taxpayer savings would range from $10 to more than $1,000 per year, depending on tax bracket and the percentage of household income spent on taxable goods.
Corporate tax breaks
The Democratic proposal would delay for two years the implementation of two recently adopted corporate tax breaks that are scheduled to take effect in 2010-11. The larger of the two is the net operating loss "carryback" deduction. The principle behind this provision is to allow businesses to calculate taxable profit by averaging income over several years. This allows a business to measure profitability (or loss) over a longer period of time that is more closely aligned with its investment horizon.
Most other states accommodate this thRough an operating loss carry forward provision, whereby current-year losses can be deducted from future year profits for tax purposes. California recently adopted the opposite approach, under which businesses that operate at a loss can apply that loss to prior-year taxes and receive a refund. The problem with this approach is that it forces the state to make cash refunds at a time when it can least afford it. The Democratic plan would suspend this provision for two years, but not repeal it.
Reactions
From Assembly Minority Floor Leader Martin Garrick: "It's sad that we are seven weeks past the constitutional deadline to pass a budget, and the Democrats are just now proposing their budget. Rather than reducing spending to close a $19.1 billion budget deficit, Democrats want to raise taxes on working and middle-class Californians to continue to fully fund government programs we can't afford. True to form, Democrats reject nearly all proposed spending reductions and resort to sticking it to the taxpayers."
From Senate Republican Leader Dennis Hollingsworth: "The Democrats' budget plan doesn't create jobs, doesn't reform pensions, and doesn't significantly reduce spending. Instead it relies on billions in income, car, gas, and business tax hikes in order to keep growing government. We need to reduce spending so that we can balance the budget without raising taxes. Democrats continue to ignore the people, who just last year rejected this tax and spend approach."
Gov. Schwarzenegger did not immediately issue a formal statement in direct response to the Democratic proposal.
Next steps
The Budget Conference Committee approved the proposal on a partisan vote Wednesday. The next step will be a floor vote in each house. Since a two-thirds vote is needed, some Republican votes would be required. If and when the proposal comes to the floor for a vote will depend on whether the necessary votes can be lined up, or on further negotiations that may take place after the expected Conference Committee action.