May Budget Revise

By Ron Roach

Awash in a $2.2-billion gusher of additional tax dollars, Governor Pete Wilson has presented updated 1997-98 state budget plans to the Legislature - the annual May Revise - that tout substantial increases in spending on education and welfare-related child care programs.

On the tax front, the governor urged passage of his business income tax relief proposal. And, responding to reporters' questions at the May 14 news conference at the Capitol, the Republican governor essentially dared the Democrat-controlled Legislature to pass a personal income tax cut.

Reporters wanted to know why the governor was not championing a personal income tax (PIT) reduction, particularly since he had in the past and so much of the state's new revenue has come from individual taxpayers. If Democrats would pass tax relief for individual taxpayers, Mr. Wilson said he would be "delighted." But he said the votes were not there due in large part to lobbying by the "education community."

When Senate President Pro Tem Bill Lockyer reacted with a comment that a tax cut should be on the table for discussions, the governor's office responded warily. "We are eager to explore the many ways tax reduction can be done," said gubernatorial spokesman Sean Walsh. Later, Mr. Lockyer clarified that he was not advocating a PIT cut but believes it is reasonable to consider it. He was quoted in The Los Angeles Times as saying "arguments against a cut probably outweigh those arguments for it ... Those taxes are arguably quite high, and as a matter of fairness, we should consider some changes in those rate schedules."

The governor proposed a 15 percent PIT rate reduction in 1995 and 1996 as recommended by his Council of Economic Advisors, led by former Secretary of State George Shultz. Mr. Lockyer and the education lobby were leading opponents to those measures, and Kevin Gordon, lobbyist for the California School Boards Association, said he was "very surprised" that Mr. Lockyer would be open to talking about a tax cut.

Meanwhile, the governor's proposed 10 percent reduction of the bank and corporation tax rate remained the major tax relief element of the revised $68.2-billion budget proposed for the year beginning July 1. The overall budget that passed last summer was $62.8 billion.

General Fund Revenue Forecast Reconciliation with the Governor's Budget Forecast for Fiscal Year 1997-98 (Dollars in Millions)
Source	Governor's Budget*	May Revision	Change Between Forecasts
Personal Income Tax	$24,240	$25,500	$1,2605	.2%
Sales & Use Tax	17,325	17,230	-95	-0.5%
Bank & Corporation Tax	5,860	5,920	60	1.0%
Insurance Tax	1,196	1,213	17	1.4%
Other Revenues	1,943	2,004	61	3.1%
Transfers	93	93	0	0.0%
Total	$50,657	$51,960	$1,303	2.6%
Change from Fiscal 96-97	$2,252	$2,595
Percent Change from Fiscal 96-97	4.7%	5.3%
*The Governor's Budget forecast has not been adjusted for the Governor's April proposals for full Subchapter S conformity and small business expensing which reduce the 1997-98 forecast by $40 million.
Source: Department of Finance

The governor congratulated the four Republicans and three of seven Democrats on the Assembly Revenue and Taxation Committee for approving the bank and corporation rate cut (AB 479, Pringle) on May 12. The measure passed with one vote to spare, but one of the Democrats, Carl Washington, later sent a letter to his Assembly colleagues apologizing for his vote and vowing not to make the same mistake when the bill comes before the Appropriations Committee. Assembly Speaker Cruz Bustamante said a general tax cut would be ill-advised, but he would consider "targeted tax cuts" for job-generating small businesses.

Mr. Wilson, in his May Revise remarks, noted that the economy flourished after enactment of tax relief measures (the manufacturers' investment credit, expanded research and development credit and last year's 5 percent bank and corporation tax rate reduction) and other laws (workers' compensation system reform) to improve the business climate. California continues to face "fierce competition for jobs" and the "surest way to hold our ground" is to make the state more attractive to job creators, he said.

Of the state's improved revenue picture, $2.26 billion above last January's expectations through June 30, 1998, personal income taxes account for $2.16 billion.

The governor proposed $392 million in additional spending for child care to enable welfare mothers to work and also pay for job searches and training. This move was expected to remove child care as an issue in welfare reform debate.

He proposed to fully fund class-size reduction for grades kindergarten through third at $800 per pupil. This requires an additional $230 million on top of the $1.25 billion already invested in the program. In addition, he would spend $110 million on standardized testing and high school computers.

Education is required to receive a whopping 98 percent of the new money because of constitutional minimum funding guarantees (Proposition 98) and remarkable enrollment, population and revenue factors. In the January proposal, schools were to get about 60 percent of the new revenue.

The revised general fund revenue forecast calls for $51.96 billion in the coming fiscal year, up 2.6 percent from the governor's January proposal and up 5.3 percent from the current fiscal year. General fund spending is $268 million below expected revenues, with a budget reserve of $580 million for economic uncertainties. The reserve is only $27 million more than January's proposal.

General Fund Revenues and Expenditures (Dollars in Billions)
&nbsp	Revenues	Expenditures
1991-92	$42.0	$43.3
1992-93	$40.9	$40.9
1993-94	$40.0	$39.0
1994-95	$42.7	$42.0
1995-96	$46.3	$45.4
1996-97	$49.4	$49.2
1997-98	$52.0	$51.7
Source: Department of Finance

Estimates reflect the governor's proposed bank and corporation tax rate cut, which would be phased in over two years; full conformity with federal changes relating to Subchapter S corporations, and conformity with increased federal limits on small business expensing. Further, the budget assumes federal legislation will enable California to set up a reciprocal refund offset program with the Internal Revenue Service for past-due state tax debts.

The governor also proposed to transfer $100 million of property tax revenues to cities, counties and special districts, spend an additional $75 million for the Disproportionate Share Hospital Program in certain counties, and appropriate $50 million for the California Infrastructure Bank.

Jobs, and more jobs. Since January, the state's economy continued to outpace the nation in personal income and job growth, according to the Department of Finance. Employment forecasts have been increased by 100,000, for a total of 680,000 new jobs forecast for the next two years. From the low point of the recession in late 1993, California's economy has created more than one million new jobs through March 1997. Personal income growth, up 6.5 percent from 1996, is expected to remain strong, increasing by 6.8 percent in 1997 and 6.1 percent in 1998.

Inflation also will remain below the national average, the department said, with consumer prices expected to increase 2.3 percent in 1997 and 1998.

The administration also stresses that the gross state product now exceeds $1 trillion. "No other state has achieved this magnitude of economic output," the report said.

State revenues. Tax receipts were projected to outpace the governor's January forecast by $960 million in 1996-97 and $1.303 billion in 1997-98. Revenue growth was expected to be 6.6 percent from 1995-96 to 1996-97. Even with the governor's tax reduction proposals and trial court funding plans, revenue growth is estimated at 5.3 percent from the current year through the budget year.

"Extremely strong growth in PIT revenues accounts for most of the change in the revenue forecast," the report said. Taxpayers have realized significant income gains that have pushed them into higher marginal tax brackets, resulting in revenue growth far in excess of income growth. Wage growth of 5.1 percent in 1995 and 6 percent in 1996 compares to growth in PIT liability of 12.4 percent and 14 percent, respectively.

"This 14-percent growth in 1996 is even more impressive given the fact that the 10 percent and 11 percent tax brackets had expired. On a comparable basis, growth for the year would be closer to 19 percent," the report said.

One important factor: the surging stock market contributed to the 22-percent increase in capital gains in 1995 and is undoubtedly an important factor in the 1996 tax year growth. Partnership and Subchapter S shareholder profits also exhibited unusually strong gains, and are expected to continue.

Sales taxes. On a fiscal year basis, sales tax revenues are expected to be up by 4.3 percent for 1996-97 and 4.9 percent for next year, reflecting steady economic growth.

Bank and corporation taxes. In 1997-98, revenues are expected to exceed last January's estimates by $60 million, reflecting continued moderate profit growth through the forecast period.