Governor Arnold Schwarzenegger announced June 17 that he will not agree to any taxes or fee increases to address the state's $24.3 billion gap between the 2009-10 budget's proposed spending and anticipated revenues.
"I cannot sign a budget that has tax increases," he said during a brief meeting with reporters. Asked if that means that he will veto the conference committee package approved the night before (see below), he said, "I will without any doubt veto it."
The governor said that after approving "the largest tax increase in state history" in February, it is not responsible for the state to come back four months later with more tax increases on Californians. He added that he will reject fees, too. "None of that will fly with me," he said.
The governor also criticized the Democrats' plan to create paper savings for 2009-10 by delaying state employees' paychecks from June 30 of this fiscal year to July 1 of the next fiscal year. "The days of gimmicks are over," he said. "There's no place left to hide."
The state will run out of cash by July 24, the governor said, and if nothing is done to solve this problem, the state will simply become insolvent.
Despite the promised vetoes, the Democrats on the conference committee voted to approve the following tax increases and "revenue enforcement and acceleration provisions":
· An oil severance tax, at the rate of 9.9 percent of the gross value of each barrel extracted from California, with an exemption for "stripper wells." (A tax increase of $1.1 billion a year, according to the conference committee's materials.)
· A tobacco tax increase equivalent to $1.50 on each pack of 20 cigarettes. (A tax increase of $1.2 billion a year, decreasing about 3 percent per year in the future as fewer people smoke, according to the committee.) Senator Ducheny supported this proposal despite her previous public statements noting that the tobacco tax is a declining source of revenue.
· A business tax increase of up to $850 million per year, accomplished by repealing tax incentives included in previous budget compromises to stimulate the economy. This includes repealing provisions that expanded the net operating loss carryforward, permitted NOLs to be carried back, and allowed corporations to assign tax credits to affiliates that are members of the same combined reporting group.
· An extension of sales tax nexus to out-of-state sellers that pay commissions to California firms or residents for sales referrals. The committee indicated that this is the same proposal as AB 178 (Skinner), which failed to garner enough support to make it through the complete legislative process. (Equates to an annual tax increase of $110 million, according to the committee's figures.)
· A requirement that non-retailers register with the Board of Equalization and file use tax returns. The committee indicated that this is the same proposal as AB 711 (Calderon), which recently passed the Assembly and is pending in the Senate. (Equates to a revenue gain of $28 million in 2009-10 and $57 million in 2010-11, according to the committee's figures.) (Cal-Tax: When the Assembly Appropriations Committee analyzed the same proposal earlier this year, it said the BOE estimated "annual increases of about $620 million in sales and use tax receipts, of which about $400 million would be (general fund) and the remainder would be special and local funds." That is quite a different estimate than the one used by the conference committee.)
· A provision described as "strengthening the definition of abusive tax shelters" to discourage tax avoidance and to increase penalty assessments. The committee indicated that this is the same proposal as SB 401 (Wolk), which recently passed the Senate and is pending in the Assembly. (Estimated annual revenue increase of $10 million to $15 million.)
· A revocation of state-issued licenses for unpaid income tax liabilities. The committee indicated that this is the same proposal as "AB 478 (Eng)," but AB 478 deals with regulating gas emissions, and is not authored by Assemblyman Mike Eng. The committee appears to be referring to AB 484 (Eng), which was rejected by an Assembly committee in April. (Estimated to generate $10 million in 2009-10 and $15 million to $20 million in future years.) (Cal-Tax: An analysis for the Assembly Business and Professions Committee earlier this year said the fiscal impact is unknown, but quoted from the author, who said, "Enactment of this bill would increase state income tax revenue by $14 million in the first year, $25 million in the second year, and $13 million annually thereafter.")
· A requirement that financial institutions perform quarterly matches of their account records with a file of tax delinquents provided by the Franchise Tax Board. The committee indicated that this is the same proposal as SB 402 (Wolk), which recently passed the Senate and is pending in the Assembly. (Estimated annual revenue increase of $27 million in 2009-10, increasing to $60 million in 2010-11 and to $100 million in subsequent years, according to the committee.) (Cal-Tax: The Senate floor analysis for SB 402 gives very different estimates. It says: "According to FTB, this bill results in increased tax collections of $35 million in 2010-11, $63 million in 2011-12, and $99 million in 2012-13, plus some increases in non tax-debt collections.")
· An extension of income tax withholding to independent contractors. (Estimated revenue acceleration of $1.9 billion in 2009-10, and annual revenue gain of $300 million in future years from increased tax compliance, the committee said.)
· A back-up withholding requirement. The committee indicated that this is the same proposal as AB 1848 (Ma) of 2008, which failed to pass the Senate last year. (Estimated revenue gain of $26 million per year.) (Cal-Tax: When AB 1848 was in the Senate Revenue and Taxation Committee last year, the FTB estimated revenue gains of $33 million per year, growing to $37 million for fiscal year 2011-12.)
Floor votes on the conference committee's plan are expected to be held this week.
Republican members of the conference committee voted against all of these provisions, and several said they objected to bypassing the Legislature's committee process. Assemblyman Jim Nielsen said he is "a little mistrustful of the process right now," especially after the February budget deal, which he said was not presented to him until he was on the Assembly floor for the budget vote.
During the discussion of the proposal requiring financial institutions to perform data matches for the FTB, Senator Robert Dutton said he is worried about encouraging harassment and allowing the FTB to "start going into witch-hunt mode." Senator Dutton mentioned a Nevada jury's decision last year in favor of inventor Gil Hyatt, who successfully sued the FTB for breach of privacy, intentional infliction of emotional distress and other charges. Mr. Nielsen agreed with his colleague, and said the FTB's potential misuse of information "is a grave concern."
Democratic Senator Alan Lowenthal said that despite his past support for nearly every tax that has come before him, it was difficult for him to support the conference committee's tax hikes because "Californians are struggling." He said the message that voters sent on May 19 was that they do not want more taxes, and added, "I would have preferred that we live within our means." He also said legislators who support tax increases "have to realize that we will pay a price for doing this."
As the conference committee neared the end of its agenda, Assemblywoman Noreen Evans, who chaired the panel, said it would be "irresponsible and unrealistic" to try to balance the budget without new taxes.
(Cal-Tax: After spending several weeks going over the budget, the conference committee dealt with these sweeping tax proposals during the last 30 minutes of its final meeting, without giving the public notice about the language of the proposals under consideration. As noted above, some of the proposals were rejected when they went through the regular legislative process that allows public input and full policy hearings. Compounding the problem, the committee's descriptions of the tax proposals included the errors and questionable revenue estimates described above, which raises questions about whether committee members based their decisions on incorrect information and unsupported fiscal estimates.)
Reacting to the governor's proposals to reduce spending in the state's major health and welfare programs, the Democrats on the conference committee made scratches rather than cuts. They rejected closing adult day-care centers to save $170 million, and instead made a $28 million reduction in the program. They did not adopt a proposal to eliminate health coverage for specified young people, and they made token cuts from the Healthy Families Program and other welfare programs.
Instead of voting to close certain state parks, the committee voted to impose a $15 car tax to raise revenue for parks.
Ms. Evans described many of the Democrats' more modest budget reductions as "compromises." Yet, it was unclear with whom the Democrats were "compromising." Certainly, the governor and Republican legislators did not agree to the so-called compromises.
The governor's proposed shift of an estimated $2 billion in property tax revenue from local agencies to the state was defeated by a unanimous, post-partisan vote of Democrats and Republicans. Before the vote, Ana Matosantos, chief deputy director of the governor's Department of Finance, told committee members that the state couldn't shift part of the property tax to schools, as the action would reduce state support below federal maintenance-of-effort standards. She said the administration is looking into alternatives.
Among the many actions taken by the conference committee was a party-line vote to adopt the governor's proposed surcharge on property insurance premiums. The committee also voted to: eliminate a subvention to counties to cover property tax losses from Williamson Act contracts; eliminate the high school exit exam to save money; raise community college fees by $6 a unit; and cut funding to the public schools by $4.5 billion, giving districts the option of shortening the school year by five days to absorb the reduction.
In other budget-related news:
Governor and Democrats Have Battle of Words Over Employee Pay Cuts. After the budget conference committee's June 16 meeting in which the Democratic majority rejected a state employee pay cut, Governor Arnold Schwarzenegger issued a statement saying: "It's outrageous that the Legislature would ask Californians to pay higher taxes but refuse to cut the pay of state workers by 5 percent. This is exactly why so many Californians have lost faith in Sacramento's ability to solve problems."
When the conference committee came back into session later in the day, Assemblywoman Noreen Evans said the governor's statement ignored the twice-a-month furloughs that she described as a pay cut for many state employees. "We rejected an additional 5 percent in pay," she said. She added that cutting state jobs will increase the state's unemployment problem. "We're just adding to it and exacerbating it," she said. (Cal-Tax: If a furlough is viewed as a pay cut, doesn't it follow that the days off would have to be viewed as 24 extra paid vacation days for state employees?)
Senate Employees May Lose "Two Pairs of Glasses Per Year" Benefit. The Senate, in an effort to reduce its own budget as it reduces the budgets of other agencies, is considering reducing an employee benefit that provides Senate staffers with two new pairs of glasses a year (including sunglasses for those who don't wear glasses, but can convince an optometrist to write a prescription for shades). A proposal to reduce the benefit to one pair per year may be discussed by the Senate Rules Committee, perhaps as early as next week. (Cal-Tax: The Assembly has a similar benefit. An employee's spouse and children also receive two pairs of glasses per year, and the benefit covers very expensive designer frames.) (Source: Los Angeles Times, June 13.)
Cal-TaxReports, June 22, 2009
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