A Message From CalTax President Teresa Casazza

May Revise: Governor Advises Restraint on Spending and Tax Increases

Teresa CasazzaGovernor Jerry Brown recently released the May revision to his 2013-14 budget proposal, and revisited his January budget message of caution on spending increases. The governor also expressed a reluctance to embrace new taxes or tax increases. “Look, we’ve just got a nice tax,” he said, citing the voters’ approval of Proposition 30 in November. “Fifty-five percent of the people voted for it. And I think we ought to take a deep breath and show how we’re spending it in a wise way before we start looking around to fill out more money.”

The California Taxpayers Association applauds the governor's message of fiscal discipline. All levels of government need to embrace this mantra, especially now, as California's economy remains fragile. Policymakers need to also refrain from committing one-time spikes in revenue to on-going programmatic expansions.

The governor’s new plan proposes general fund spending for 2013-14 that is $1.3 billion less than he proposed in January, while his new budget increases current-year expenditures by $2.7 billion.

The budget includes a reserve of approximately $1.1 billion (similar to what was projected in January). The budget does not address the unemployment insurance fund deficit, or the more than $100 billion in unfunded retiree health and pension liabilities.

Notable components of the spending plan:

Revenue Estimates. The impact of the $4.5 billion in unexpected general fund cash-flow revenue at the end of April, as reported by the controller, is dissipated in the May Revision. In the current budget year (2012-13), estimated revenue for the full year is only $2.8 billion higher than in the January budget. Some of the difference is due to timing – counting some of the money as either revenue in the 2011-12 fiscal year or the 2013-14 fiscal year.

Additionally, forecasts for May and June revenue have been reduced below January estimates. The May Revision also projects slower economic growth in the future than was projected in the January budget, due to the federal payroll tax increase and the federal “sequester.” Because of the Proposition 98 school finance formula, the state is required to increase school revenue by 103 percent of the increase in the revenue estimate for 2012-13 ($2.9 billion).

For 2013-14 (the budget now being developed), the general fund revenue estimate has been reduced $1.27 billion below January’s estimate, due to the big shift in capital gains payments from the 2013 tax year to the 2012 tax year (as result of the federal fiscal cliff in December).

In total, general fund revenue estimates are:

What is dramatic about the new estimates is the 11.8 percent increase in revenue from 2011-12 to 2012-13.

Enterprise Zones/Sales Tax Exemption for Manufacturing Equipment Swap.  The revised budget proposes to shift existing enterprise zone funding to support:

In addition, the New Jobs Hiring Credit created in 2009 will be revamped to prioritize credits for targeted high-unemployment areas, veterans and people receiving public assistance. The $730 million swap package is projected to be revenue neutral.

Cap-and-Trade Revenue. The budget would shift $500 million of cap-and-trade revenue to the general fund, in the form of a loan (this is the same dollar amount proposed by the governor in January, but uses a different mechanism to shift the money).

Retroactive Tax on Medi-Cal Managed Care Plans. Like the governor’s January budget proposal, the revised budget proposal includes a retroactive tax increase on Medi-Cal managed care plans beginning in the 2012-13 budget year.

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