Governor Gavin Newsom released his revised budget proposal May 14, a $203.3 billion spending plan for the 2020-21 fiscal year that calls for higher taxes on California businesses via suspending net operating loss provisions and capping the amount of tax credits a business can claim.

Newsom proposed the NOL suspension for 2020, 2021, and 2022 for what his budget summary describes as “medium and large businesses,” without additional details. The revised budget also would limit business incentive tax credits from offsetting more than $5 million of tax liability for 2020, 2021, and 2022.

These tax changes will cost taxpayers $4.4 billion in 2020-21, $3.3 billion in 2021-22 and $1.5 billion in 2022-23, according to the budget summary.

Proposed spending from the general fund and special funds is scaled back from the record-high $222.2 billion budget Newsom proposed in January. If approved by the Legislature, the revised budget would mark the first time in many years that year-to-year spending would decrease, as the budget enacted last summer included $214.8 billion in total spending. (CalTax: The actual amount of spending is not identical to the amount approved in the budget, as some spending is based on health and welfare caseloads that change as the fiscal year progresses, and the Legislature often adds appropriations after the budget is enacted.)

“COVID-19 has caused California and economies across the country to confront a steep and unprecedented economic crisis – facing massive job losses and revenue shortfalls,” Newsom said. “Our budget today reflects that emergency. We are proposing a budget to fund our most essential priorities – public health, public safety and public education – and to support workers and small businesses as we restart our economy. But difficult decisions lie ahead.”

The governor’s budget now goes to the Legislature for negotiations, with a constitutional deadline of June 15 for the Legislature to approve a budget bill for the fiscal year that begins July 1.

Newsom said drastic changes are needed to address what he projected to be a $54.3 billion deficit – the difference between projected revenue and projected spending if no changes are made.

Illustrating the imprecise nature of the projections, the Legislative Analyst’s Office last week estimated the deficit – which it described as the state’s “budget problem” – to be anywhere from $18 billion to $31 billion, depending upon how the economy recovers from COVID-19. The analyst said Newsom’s estimate is larger because the administration projects lower tax collections and higher caseload-driven costs, and because the governor’s estimate defines authorized spending differently. Some of the spending in the governor’s deficit estimate is discretionary and therefore shouldn’t be included in the deficit, the analyst indicated.

The state constitution requires the Legislature to approve a budget that is balanced on paper based on projections. Lawmakers have a great deal of latitude in how the projections are made. Large portions of past projected deficits were bridged via optimistic estimates of revenue and government efficiency improvements, among other things.

Newsom’s revision includes significantly reduced revenue projections: personal income tax revenue revised downward by almost $33 billion from the January plan; sales tax receipts down by almost $10 billion “due mainly to lower consumption and investment by businesses”; and corporation tax revenue down more than $5 billion “based on a significant drop in corporate profits.”

Property tax revenue is expected to grow 3.5 percent in 2020-21, which is 2.2 percentage points lower than the 5.7 percent growth projected in the January budget.

Newsom’s plan to balance the budget in 2020-21 calls for $8.4 billion in savings from canceling planned expansions and reducing spending; $8.8 billion in spending from reserve accounts; $10.4 billion in borrowing, transfers and deferrals; $4.4 billion from the NOL changes and limit on tax credits; $8.3 billion in anticipated federal funds; and $14 billion in a variety of reductions that Newsom said will be restored if the federal government provides funding.

Notable provisions of the revised budget:

  • Continuing a previously approved increase in the state minimum wage, effective January 1, 2021.
  • Providing $44.9 billion in general fund support for schools and community colleges and $6 billion in additional federal funds to supplement state funding.
  • Maintaining recent expansions of the earned income tax credit, at a cost of $1 billion per year.
  • Saving $2.8 billion in the first year by cutting state workers’ pay 10 percent, relative to June 2020 pay levels, pending negotiations with state employee unions – with a warning that the administration will include a budget provision to impose reductions if the state and unions don’t reach an agreement. The governor said he and his staff will lead by example. (CalTax: The governor’s pay is set by a seven-member commission that meets by June 30 every year to adjust elected officials’ salaries and benefits, but the governor can choose to forego pay.)
  • A 5 percent reduction in spending by every state agency, to be achieved through efficiency measures, fewer purchases, travel reduction and other means.