Legislative Update:
Legislature Begins Budget Process

The Senate Budget and Fiscal Review Committee met January 19 for an informational hearing on the governor's 2012-13 budget, but took no action on the spending plan.

Department of Finance Chief Deputy Director Michael Cohen provided a broad overview of the proposed state budget, indicating that the plan assumes receipt of $6.9 billion in revenue from the governor's tax increases that are yet to be approved by the voters (a half-cent sales tax increase and an income tax increase of 1 percent to 2 percent on taxpayers with adjusted income of $250,000 or higher). He also outlined the triggered cuts targeted to education if voters reject the tax initiative. Both Democratic and Republican members of the committee questioned the basis for the revenue projections and the impacts of the proposed cuts.

Senator Roderick Wright questioned whether the revenue levels anticipated from the tax increase on high-income earners are realistic. He indicated that there has been an "exodus" of taxpayers from California, and said these taxpayers are the high-income earners. He also questioned the wisdom of the state's overreliance on their incomes as a source of revenue, given their volatile nature. "My people built the pyramids in Egypt, and there's a reason why the flat part is on the bottom – it's to provide stability," he said.

With regard to the sales tax increase, Senator Wright said it is regressive, and added, "The tax on a roll of toilet paper is the same in Beverly Hills and Compton." He said he understands the politics behind the tax increases, but said the increases constitute poor public policy and that the budget "could have done it better for poor people."

Other members of the committee asked about the impact of the proposed cuts on education and social services, and the reasons for eliminating the Commission on the Status of Women.
Following the budget testimony by Mr. Cohen, the Legislative Analyst Mac Taylor presented his observations of the budget, indicating that the state is in a better fiscal position this year than last, and opining that the combination of tax increases and cuts proposed in the budget would eliminate the structural deficit within several years.

On the revenue side, Mr. Taylor cautioned that the governor's estimates are higher than his due to differences in projecting income tax from high-income earners. This poses a "down-side risk" that could mean more program cuts if the optimistic revenue projections aren't met.

Senator Mark Leno, who chairs the budget committee, asked whether the budget "holds education hostage" by targeting 90 percent of the triggered cuts at schools if the governor's tax initiatives are rejected. Mr. Taylor responded that although school funding is a large portion of the budget, it constitutes 40 percent, not 90 percent of the budget, and that the Legislature can change the allocation of the trigger cuts as it sees fit.

Senate Republican Leader Bob Huff suggested that there are alternatives besides tax increases or cuts to education, noting that other revenue sources may be redirected to maintain education programs. The legislative analyst agreed, indicating that in the past, his office has proposed solutions that "do not increase tax rates."

Senator Huff also questioned whether the governor would sign a budget that does not include pension reform. Mr. Cohen responded that he does not know what the governor would do in that regard, but said the governor is committed to pension reform. There are "many different levels of commitment," Senator Huff said, adding that he hopes the governor will provide some near-term relief if he is going to "saddle taxpayers with 30 or 35 billion dollars more in taxes."

The hearing lasted about two hours. Individual budget proposals are expected to be discussed in more detail during budget subcommittee hearings in mid-February.

In other legislative action:

Committee Approves $250 Billion Single-Payer Health Care Bill. The Senate Appropriations Committee voted January 19 to approve SB 810 (Leno), a single-payer health care bill that would provide government-run health care coverage for all 37 million California residents, at a cost estimated by the committee to be as high as $250 billion annually.

The bill, sponsored by the California Nurses Association and the California School Employees Association, passed on a party-line vote of 6-2. It now goes to the Senate floor.

Ken DaRosa, program budget manager at the Department of Finance, said that while the department does not have an official position on the bill, the near- and short-term costs to the state's general fund would be substantial. Senator Mark Leno maintained that state costs would decline as the need for private insurance companies is eliminated and the state negotiates directly with health care providers.

Senator Leno said his plan makes sense. "California is being overrun by out-of-control health care costs, which have a significant impact on families, businesses and the state budget," he said. "By guaranteeing universal access for all Californians, our single-payer plan will reduce the health care burdens that are hurting families and our state's economy."

Testimony for the bill was lengthy. Many of the comments from the public focused on the rising costs of health care, and supporters claimed the bill would keep medical costs down for consumers. The bill even drew several supporters from the United Kingdom who presumably would not be impacted by the legislation.

In a letter sent to the committee, CalTax wrote: "While CalTax understands the need to improve health care access in this state, we believe that SB 810 is not the right solution. Since 1999, CalTax staff has compiled hundreds of reports of misspent taxpayer resources amounting to tens of billions of dollars. … Moreover, the (Legislative Analyst's Office) opined in a 2008 report that payroll taxes for employers and employees would need to be 4 percent higher than they are now for single-payer costs and revenues to balance. The necessary increase in taxes would discourage business growth, hurt investments and chase jobs away from this state."

January 20, 2012

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