The Legislature’s budget deliberations kicked into high gear this week with committee hearings on Governor Gavin Newsom’s budget revision.
The governor’s budget plan includes $9.2 billion in tax increases on California employers, to be imposed by suspending net operating loss provisions and capping the amount of tax credits a business could claim during three tax years. These provisions were discussed in the committees, but not brought to a vote.
Assembly Speaker Anthony Rendon truncated the budget process in his house by providing only one week for subcommittees to meet. The Assembly’s budget deliberations will culminate Tuesday with a rare “committee of the whole” meeting (see story below).
The Senate will continue its subcommittee process over the holiday weekend, with two hearings scheduled for Sunday and one on Memorial Day. Legislative staffers are not union employees, so lawmakers were not required to negotiate a contract change to call the employees to work on the holiday.
During this week’s hearings, many members of the subcommittees noted that under normal circumstances, each panel would meet approximately 10 times to deliberate budget proposals.
Both houses heard from Legislative Analyst Gabe Petek, who voiced concern that Newsom’s deficit projection appears to be too high (Newsom projects a $54.3 billion shortfall if no spending or revenue changes are made to the current budget, while Petek projects an $18 billion to $31 billion shortfall, depending on how long it takes the state to recover from COVID-19). Petek also estimated that Newsom’s proposed tax increases would not bring in as much as revenue as the governor projects.
To balance the budget, Newsom proposes to: spend approximately $7.8 billion from the rainy day fund, use $450 million from the social safety net reserve, decrease education funding to the minimum allowed under Proposition 98, impose tax increases, and employ various budget tactics including special fund loans and projected savings from salary reductions and increased government efficiency.
The Legislative Analyst’s Office projects much lower revenue from the governor’s proposed tax changes. In a report to lawmakers, the office explained: “Whereas the administration estimates suspending NOLs and limiting credits as they propose would increase revenue by $4.4 billion in 2020‑21, we estimate that the revenue effect could be $2.9 billion to $3.6 billion. Our lower estimates are driven by our office’s lower expectations for taxable corporate income. Given lower taxable income, the amount of NOLs and credits corporations would use in the absence of the proposed limitations would also be lower.”
Newsom also proposes raising revenue by imposing a targeted tax increase on vapor products at a rate of $2 per 40 milligrams of nicotine content. This would cost taxpayers $44 million annually, according to the Department of Finance. Committee members and the legislative analyst stated that California does not have enough data on vapor product consumption. Lawmakers and the analyst also said the cost of administering the tax – estimated by the governor to reach 40 percent of the new revenue collected – is far higher than the cost of administering most other taxes.