There were no signs last week that a budget compromise is near, and the
state went another week into the new fiscal year without a complete budget
being introduced in legislative form, let alone being voted on.
Meanwhile, Controller John Chiang reported August 10 that time is not
healing the state's budget wounds, as July's revenues were below the governor's
May Revision estimates by $91 million (1.9 percent), while expenditures were
running $963 million ahead of estimates through July 31.
The state ended the 2009-10 fiscal year with a $9.9 billion deficit, the
controller added.
"While July's numbers do not radically change our cash position, the
failure to pass a timely budget remains the biggest threat to California's finances,"
Controller Chiang said.
The controller noted that the Legislature and governor approved a series of
scheduled payment deferrals earlier this year. That legislation calls for an
October education deferral to be accelerated into September if necessary to
maintain the state's cash flow. When that payment is deferred in September, the
state is projected to maintain safe cash levels into October.
"Yet without a balanced budget that allows the State to begin its
regular cash-flow borrowing, the State may still have to take extreme measures
to manage cash, including IOUs, by late August or early September,"
according to a news release from the Controller's Office. The state's $13.7
billion cash deficit is being covered entirely by internal borrowing.
In July, personal income tax revenues were $210 million below estimates
(6.6 percent), corporate taxes were up $86 million (37.4 percent), and sales
taxes came in $69 million above estimates (6.6 percent).
Compared to July 2009, total general fund revenue this July was up $99
million (2.2 percent). Personal income tax revenue was 4.7 percent higher,
sales tax revenue was 4 percent higher, and corporate taxes were 5.9 percent
lower than the same month last year.
In other
budget-related news:
Senate Leader Says Cuts to Education and
Welfare Are Off the Table. Senate
President Pro Tem Darrell Steinberg held a press conference August 12 to
announce that budget cuts to education and welfare-to-work programs are off the
table for Democrats. The Sacramento Bee
noted that Democrats and Republicans use a different definition of what
constitutes a "cut" in spending: "Senate Republican Leader
Dennis Hollingsworth, R-Murrieta, said California can't ask taxpayers for more
money after raising taxes on sales, vehicles and income last year. He said
Schwarzenegger's budget would provide schools with the same dollar amount they
received last year. Democrats consider that equivalent to a $3 billion cut
because the state has to spend more money to sustain the same level of programs
as last year, in part because the state now has to pay off past costs that were
deferred." (Source: The Sacramento
Bee, August 13.)
Legislative Analyst Says Democratic Budget Has Tax Hike on Middle Class. During a two-hour discussion of some of the tax provisions of the Democratic leadership's budget proposal, a representative of the non-partisan Legislative Analyst's Office (LAO) testified that the proposal would result in a net state and federal tax increase for Californians in every income group from $20,000 to $200,000 a year.
The analysis from Jason Sisney,
state finance director for the LAO, came during the Senate Revenue and Taxation Committee's August 11 no-vote
hearing on the portions of the Democratic leadership's tax proposal that would
reduce the state sales tax rate while increasing the state's income tax and car
tax. By increasing taxes that are deductible from federal income tax, and
decreasing a tax that is not deductible, the proposal attempts to lessen the
impact on California taxpayers and shift some of the state's tax burden to the
federal government. The hearing did not go into other provisions of the plan,
such as the proposed oil production tax or tax enforcement provisions.
Senator Elaine
Alquist noted that under the plan, California taxpayers could be hurt if the
federal government changes its deductibility laws. Senate President Pro Tem
Darrell Steinberg, who presented the Democratic leadership's plan to the
committee, said the Legislature can come back and "refine" the state
tax changes if the feds change deductibility laws.
Senator Steinberg
praised Senator Rod Wright, saying he was a key voice in the Democratic caucus
for this approach to altering the tax code. Senator Wright explained his views
on tax policy, saying a "fundamental element" is that all
Californians pay taxes. "Everybody should put something in the plate and
have some skin in the game, whether you're a welfare mother in Watts or (live
in) a palace," he said.
Senator Wright
also voiced support for tax incentives to stimulate job creation, and for
avoiding tax increases that would stifle the economy and lead to a net
reduction in revenue. He said the state should exempt manufacturing equipment
from sales tax. This is not a "giveaway," he said, because it would help
the state. He said a car manufacturer would pay $50 million in sales taxes to
start a production line in California, but would pay nothing in Texas.
The senator said
"people will adjust … to account for (taxes)," and cited the federal
yacht tax and state tobacco tax as two taxes that have led to major changes in
behavior.
Senator Roy
Ashburn said he doesn't support the Democratic tax plan, but he praised
Democrats for proposing major changes to lessen volatility by reducing the
state's reliance on income taxes on high earners. "This plan isn't the
total answer, but this conversation today is an important step," he said,
toward tax reform that would establish a more stable revenue system for
financing state government.
Robert Ingenito, from the Board of Equalization, cautioned
lawmakers to allow for enough time for the state and businesses to implement
any changes in the sales tax. He said the BOE needs approximately one month to
train staff and notify retailers of any change in the rate. He also noted that
the Democratic leadership's budget estimate assumes that their proposed sales
tax change would be in effect for the entire fiscal year, which does not
account for the lead time or the nearly two months that already have gone by.
Professor Joe Bankman, of the Stanford Law School, said he likes the
Democratic proposal because he thinks it is a very good idea for states to use
more taxes that are deductible from federal taxes. However, he criticized some
existing elements of the state's tax policy, saying, "We're taxing
business inputs – that's just stupid." The professor called for a sales
tax on services, and recommended a higher gas tax to discourage driving, and reductions in other taxes if the cuts would
encourage more productive economic activity.
Governor Says Tax Increases Appropriate Every
20 Years. Governor Arnold
Schwarzenegger said during an August 10 speech to San Jose Silicon Valley
Chamber of Commerce that he is done raising taxes. "Every 20 years we can
go there," he said, referring to tax hikes. He noted that Governors Ronald
Reagan and Pete Wilson both raised taxes, as he himself did in 2009.
Governor
Schwarzenegger said the state now is benefitting from the revenue from the 2009
tax increases, and added, "Why would I go and increase it again?"
As he has done in
several recent speeches, the governor said the state needs to stimulate the
economy to bring in extra revenue. "Let's give incentives to businesses –
tax incentives, new hire tax incentives – so that you inspire businesses to
hire more people," he said.
Californians' Income Down
$40 Billion From Last Year. The
federal Bureau of Economic Analysis reported this week that personal incomes of
California workers fell by $40 billion in 2009 compared with the previous year
– the state's first year-to-year decline since World War II. The bureau said
2009 income statewide totaled $1.56 trillion, down about 2.5 percent from $1.6
trillion in 2008. The 2009 level also came in just under the 2007 total.
California's decline
was a third more than the national 1.8 percent personal income drop, reflecting
the relative intensity of the state's recession. (Source: The Sacramento Bee, August 11.)
Feds Approve $2.5 Billion for California
Teachers and State Government Programs. The U.S. House of Representatives voted August 10 to approve a $26
billion jobs bill that will send at least $2.5 billion to California "to
help balance the state budget and pay the salaries of its schoolteachers,"
The Sacramento Bee reported.
President Barack Obama immediately signed the measure.
H.D. Palmer of the California
Department of Finance said the bill will send $1.2 billion directly to the
schools and another $1.3 billion can be used to help plug the state's budget
hole. The amount is about $500 million less than the governor's budget proposal
assumes.
Democrats said the money
will keep approximately 16,500 California teachers from being laid off.
(Source: The Sacramento Bee, August
11.)
Cal-TaxReports, August 16, 2010
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