The 1925 Hawaiian love song "Drifting and Dreaming" could become the theme song for the 2010-11 state budget negotiations. Since the start of the new fiscal year nearly one month ago, the pace of negotiations has been slow, with no apparent progress. Most legislators have been on call on an unofficial summer recess, and are scheduled to return to the Capitol next week.
As a result, Governor Arnold Schwarzenegger reinstated three-days-per-month furloughs on selected state employees.
As the negotiations continued drifting, Assembly Speaker John Pérez continued dreaming about balancing the budget with billions of dollars' worth of new borrowing to paper over the deficit. This idea has been denounced by Governor Schwarzenegger, Attorney General Jerry Brown and State Treasurer Bill Lockyer.
Meanwhile, Senate President Pro Tempore Darrell Steinberg is vetting an idea to raise state income tax (but not the top 9.3 percent rate) and the state car tax while reducing the state's sales tax. Combined, this plan would increase state taxes by $2 billion to $3 billion to help reduce the budget deficit. Mr. Steinberg estimates that taxpayers would come out even in the aggregate, because income and car taxes are deductible from federal taxes, while sales taxes are not. (Cal-Tax: We have not seen the details of the rate increases, or the reduction of the sales tax, so it is not known if the plan pencils out.)
Jean Ross, director of the California Budget Project, denounced the tax swap plan, saying only 38 percent of California taxpayers itemize their deductions.
The lack of substantial budget activity is in significant contrast to past years, when legislative budget talks kicked into high gear after the fiscal year started without a budget in place.
Sacramento Bee columnist Dan Walters speculated July 27 that there will be no budget in place "anytime soon." He added that both proponents and opponents of Proposition 25 (the November ballot measure that would reduce the vote requirement for the budget and budget-related tax increases) may have a vested interest in a long budget stalemate. "The Proposition 25 campaign could urge voters to punish legislators by emphasizing the measure's provision that would strip them of their pay and living expenses when the budget is late," he wrote. "Meanwhile, the anti-Proposition 25 campaign could contend that it's a power grab by the same politicians who are not doing their jobs now."
In a July 23 column published on the Fox & Hounds Daily blog, Republican Assemblywoman Diane Harkey said the Democrats seem to be intentionally delaying action. She wrote: "One rumor is that a delay until we run out of cash in the fall might play into the 'dysfunctional' Legislature theme, forcing a 'bi-partisan' agreement (read: raise taxes). Another rumor is that the Democrats want to convince voters that the two-thirds vote requirement to pass a budget is the problem, and they are willing to inflict budget pain in the schools and on the streets, or through IOUs when funding stops, to make their point."
The delay also means that any spending reductions or revenue increases eventually approved will not be in effect for the entire fiscal year. (Sources: George Skelton in the July 29 Los Angeles Times; KQED reporter John Myers' blog, July 28; and Jean Ross comments on "California Budget Bites.")
In other budget-related news:
Governor Says California Needs to Live Within
Its Means. Governor Arnold
Schwarzenegger denounced Assembly Speaker John Pérez's
borrowing plan, as well as Senate President Pro Tem Darrell Steinberg's budget
that includes tax increases, stating that California needs to live within its
means. The governor's comments were made during a July 26 discussion with the
business community in Los Angeles.
The governor
recalled a story he was told by Israel's prime minister last year. The story
involved three people competing in a race. The first racer carried someone of
equal weight on his shoulders, the second racer carried a much larger person on
his shoulders, and the third racer carried someone who weighed much less than
he did. In the story, the governor explained that first racer did well; the
second racer took several steps, stumbled and fell; and the third racer blew
past the others and won. The governor explained that the racers represent the
private sector, and the top person is the public sector. "The private
sector cannot carry a public sector that is that much bigger," he said.
The governor said
that there is a "misconception that you should protect the public sector
at all costs." He said California seeks to "punish the private sector
and go after them and ask them for more money – so many times you will hear the
word 'corporation' or 'business' being used as if it is a four-letter word."
Suggesting that the
state needs to grow the economy to end future deficits, the governor said he is
fighting for various tax credits, including the homebuyer tax credit and the
green manufacturing sales tax exemption.
Specifically
discussing the film tax credits approved in 2009, the governor said that "any
tax incentives that were given, we want to continue with those because those
were very successful."
The governor also explained
that once the budget passes, he will review and consider taking positions on
the November ballot measures. However, he said: "Any attempt that is being
made to have a fee increase by a simple majority, or a tax increase by a simple
majority, should be immediately pushed back and we should attack no matter what
it would take, because it would be absolutely disastrous for the state of
California if you can do simple majority for fee increases, tax increases or
even the budget."
Governor
Schwarzenegger continued: "If you do a budget with a simple majority, you
know, again, there is one party that will make all of the decisions. I think it
needs the input of both of the parties because you can see this year, the first
thing (Democrats) did was come up with borrowing or tax increases. Those were
the two choices. There is a balance with a two-thirds vote, the other side says
let's look at all the things we can do to save money."
The two-thirds vote
requirement to pass a budget helps control the "insatiable appetite"
of the Legislature to increase spending, the governor said.
While the governor
said a budget could be signed within the next few weeks, he later told the Associated Press that negotiations could
stall and be put off until 2011, when he is no longer in office. Referring to
his request for pension and tax reforms, Governor Schwarzenegger said: "If
I don't get what I need, I will not sign it and it could drag on to the next
governor."
Senator Steinberg responded:
"If the governor continues to insist on granting billions in corporate tax
cuts financed by drastic cuts to public education and programs for working
mothers and their children, I am prepared to grant his wish by waiting for the
next governor." (Sources: The Sacramento
Bee, July 26; Governor's presentation to the Los Angeles Area Chamber of
Commerce, July 26.)
Businesses Affected by Lack of Budget Can Request Extension for Paying Taxes. Vendors who do business with the state but haven't been paid due to the lack of a state budget may request an extension to file sales and use tax returns and make tax payments, Board of Equalization Chair Betty Yee announced July 19.
To ask for an extension, businesses must make a request in writing and mail it to the BOE's Return Analysis Unit at P.O. Box 942879, Sacramento, CA 94279-0035. The request must include the account number, the reporting period for the request, how much the state owes the business, and a reason for the extension request.
BOE has provided a form (BOE-468 "Request for Extension of Time to File a Tax Return") to simplify the process. Requests must be received on or before the last day of the month following the month after a budget is adopted. As such, taxpayers may request relief during this extension period even after the due date of the return or prepayment.
If an extension is granted, businesses must file and pay the return by the end of the extension period. There will be no penalties if the return is filed and paid in full by the end of the extension period. During the extension period, there is no interest applied on the amount of the tax due equal to the amount the state owes the business.
It Takes 25 Private-Sector Jobs to Support One State Employee, Report Says. Assembly Republican Leader Martin Garrick released a report July 22 showing that it takes 25 private-sector jobs to support one state employee. Assemblyman Garrick said this statistic is directly related to the state's budget problems. "Over the last five years California has lost 1.3 million private-sector jobs while state government has grown by more than 38,000 positions," he said. "It's no mystery that multibillion-dollar budget deficits persist when Democrats refuse to significantly reduce the size of government, while the private-sector jobs that fund state government flee California."
Controller Prepares to Issue IOUs. State Controller John Chiang said that unless a state budget is passed within the next few weeks, he will be forced to issue IOUs to more than 200,000 state employees and vendors in lieu of paychecks. "Failure to find consensus on an honestly balanced budget is not an option," he said. "Every passing day of political paralysis leads us closer to a completely avoidable fiscal meltdown that will plunge the state's credit ratings into junk status, slow the state's economic recovery and force us to issue IOUs to innocent Californians." (Source: Central Valley Business Times, July 26.)
Cal-TaxReports, August 2, 2010
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