This article is from Cal-Tax Digest, published
by the California Taxpayers' Association.
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State Budget: Clearly, Education Comes First
By Tim Gage

The May Revision to Governor Davis' January budget proposal reflects the governor's continuing commitment to his top priority, improving the quality of California's public schools. It also includes important expansions in health care and public safety, and new investments in transportation, housing and natural resources.

The revised $98.4 billion budget for the fiscal year starting July 1 also adds to the state's reserve for economic uncertainties and prudently invests more than half of the new revenue into one-time, rather than ongoing, expenditures. It rewards the taxpayers who made our strong economy possible with $1.9 billion in new tax relief.

But clearly, education comes first. The budget invests $3.992 billion in new revenue in K-12 education, boosting per-pupil spending to $6,672, for a total increase of more than $900 per pupil in two years.

The education component includes $1.84 billion in unrestricted funds to school districts, which eliminates the deficit in cost-of-living adjustments from the early 1990s. It funds rewards for teachers and administrators whose schools show significant improvement in academic performance, pays for new computers and Internet access, and provides for intensive English language instruction.

The budget dramatically showcases the tremendous value of California's teachers. The governor's proposal to exempt income from teaching at public schools from the state income tax reflects his belief that no profession is more vital to our state's ongoing prosperity.

All of this was made possible by the state's booming economy, which provided revenues for the two-year period $12.3 billion higher than forecast in the January budget.

The revenue surge is being propelled by growth in capital gains realizations and stock option income that has far outpaced projections. These two sources now account for about $12 billion, or about 17 percent of total general fund revenues. But the very volatility of this increasingly important revenue source demands prudence. Accordingly, the governor proposes to spend 57 percent of these new revenues on one-time appropriations.

Hard-working California taxpayers make all the worthwhile programs funded in the budget possible. That's why the centerpiece of the governor's tax proposal is the "Prosperity Dividend," a $1.76 billion income tax rebate of up to $150 for single and $300 for joint return filers.

The budget also includes a $154 million proposal to more than double senior citizens' property tax and renters tax relief. More than 500,000 low-income seniors in California will benefit from this expanded tax assistance.

The budget also expands the research and development tax credit for businesses from 12 percent to 15 percent. This change will save California businesses $16 million.

Finally, the budget proposes to expand the net operating loss carryover by increasing the amount of loss that a business can carry forward into the following tax year. In January, the governor proposed to increase the allowable carryover from 50 percent to 55 percent in 2000 and 60 percent in 2002. In the May Revision, he proposes to raise it to 65 percent in 2004.

This tax relief is in addition to the $167 million in tax incentives outlined in the January budget, which were designed to encourage conservation, aid the development of the "New Economy," and assist those caring for the elderly and disabled.

The governor's May Revision is not just a result of prosperous times, but also a blueprint for California's continuing economic success.