This article is from Cal-Tax Digest, published
by the California Taxpayers' Association.
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The Governor's Budget
By Tim Gage

As with his prior budgets, Governor Gray Davis' 2001-02 budget is again focused primarily on improving the educational performance of students throughout California, including significant additional resources for efforts to lengthen the school year and enhance the performance of our teachers and principals.

The budget also provides resources to address California's crucial energy supply issue, higher education, environmental protection, and health care, while providing for a prudent reserve and targeted tax relief.

The budget is founded on an economy that, in spite of concerns of potential national slowing, continues to create new jobs and increased wages in California. While the recent period of explosive growth may have passed, economic growth continues at a steady and sustainable pace. Our unemployment rate continues to decline, while growth in the labor force and the number of jobs in California far exceeds the national rate.

The state's economic strength directly affects the revenues in the budget. In the current year, for the first time, revenues from capital gains realizations and stock options will account for more than 20 percent of total general fund revenues. So, while we've benefited enormously from these sources of revenue, we also face significant exposure to their high volatility.

For the budget year, we combine a forecast of a modest decline in capital gains and stock option revenue with sustained growth in jobs and wages, to produce moderating growth in all general fund revenues. And once again, the governor has wisely decided to use nearly half of the new revenues for one-time, rather than ongoing, expenditures.

To help our economy continue to prosper in this changing environment, the budget proposes targeted tax changes that are designed to reduce the tax burden on consumers and businesses, stimulate further expansion of small businesses and key industries, help relieve traffic congestion, and ease the shortage of qualified teachers. Specifically, the proposed tax changes are as follows:

• Provide a three-day sales tax holiday on back-to-school necessities in late August, saving taxpayers $27 million on these important purchases.
• Increase the manufacturers investment credit (MIC) from 6 percent to 7 percent, saving manufacturers $255 million over three years.
• Extend the sunset for the MIC to January 1, 2008, to provide certainty for business' long-term planning.
• Add software developers to the manufacturers investment sales tax exemption to provide them consistent treatment with other manufacturers.
• Expand the current sales tax exemption for space flights to include property used in spaceport operations or for assembly, launch, or transport, to keep the state competitive in this growth industry.
• Increase the capital gains exclusion for small business stock from the current 50 percent to 100 percent for gains on stock held more than five years, for stocks purchased after Jan. 1, 2001.
• Provide a credit for employers who provide subsidized transit passes to their employees, to encourage employers to help fight traffic gridlock and improve air quality.
• Create a credit for employers who loan employees who are qualified math and science teachers to public schools, to help alleviate a shortage of these crucial teachers.

Governor Davis' administration begins the new year with justifiable pride in the governor's accomplishments of the past two years. With this budget, we look ahead to sustaining California's strength to 2001 and beyond.

Tim Gage is director of the California Department of Finance.