January 2002

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State Budget 

B. Timothy Gage is director of the Department of Finance.

In his prior budgets, Governor Gray Davis outlined his plans for best serving the people of California in times of an expanding economy and growing tax revenues. This year, he responded to a different, and tougher, challenge – protecting the public interest in a more difficult fiscal climate.

Consequently, his 2002-03 budget reflects the difficult decisions to trim spending to ensure that the state lives within its means. But it also reflects his longstanding top priority of improving public education, and it protects public safety, maintains the expansion of children’s health care, and includes continuing tax relief.

The sudden and sharp decline of the stock market resulted in a corresponding drop in state tax revenues, leaving us with a combined current year and budget year shortfall of $12.5 billion. The budget proposes to close that gap with expenditure reductions totaling $5.2 billion; funding shifts of $586 million; loans and deferrals of $2.1 billion, accelerations and transfers of $3.5 billion; and federal funding increases of $1.1 billion.

This approach takes into account the consensus view of economists for an economic recovery, and a resulting increase in state revenues, in the second half of this calendar year. With this forecast in mind, it makes more sense to use some future revenues as a budget resource, than to call for higher taxes or draconian cuts in essential services such as education, public safety and children’s health care.

Moreover, the $4.3 billion worth of ongoing annual tax relief enacted during the governor’s first three years in office remains protected in this budget. 

The largest of these measures is the $2.7 billion value of the further reduction in the vehicle license fee. The prior administration had enacted a reduction in the fee, but made the actual reduction contingent on growth in budget reserves. Gov. Davis eliminated this hurdle and increased the amount of this tax cut.  Without this action, Californians would not have received this additional relief.

Other tax relief measures enacted during the Davis administration included:

·         An increase in assistance for senior homeowners and renters;

·         Tax credits for teachers;

·         A refundable child care credit;

·         An increase in the research and development credit;

·         An increase in health insurance deductions for the self employed;

·         Exemptions for various agricultural items

·         Increases for net operating losses;

·         A long-term care credit;

·         Relief for graduate students;

·         A credit for land donations;

·         Credits for solar and wind energy.

Also of importance to taxpayers is our proposal to conform California tax law to recently enacted federal tax law changes. Proposed changes in IRA contribution limits would save taxpayers $44 million a year. The proposal would also conform to taxpayer-friendly federal rules for qualified tuition plans, dependent care, and alternative minimum tax treatment of charitable contributions. It would require corporations, as do most other states to use their federal election, such as Subchapter S, for state purposes. Finally, it conforms to federal rules regarding estimated payments for personal income taxes.

This budget is balanced. We will be closely monitoring state revenue receipts and propose adjustments as necessary in the May Revision.

With this budget Governor Davis has made the tough decisions needed to address the fiscal challenge we face. He has provided the Legislature with a realistic budget proposal that meets the needs of this state.