State Budget

Governor Signs Budget Bills, Legislature Begins Recess

State Capitol Sacramento slider

Governor Gavin Newsom signed a $308 billion state budget and several budget trailer bills this week, and the Legislature began its month-long summer recess.

Numerous budget trailer bills were unveiled early in the week and approved by the Legislature on June 29 – part of a package that included a “budget bill junior” and implementation bills negotiated by the governor and Democratic legislative leaders.

The new budget makes major changes to the budget bill sent to Newson just before the June 15 constitutional deadline. It includes a “tax rebate” to specified taxpayers (based on income rather than taxes paid), a new tax on lithium extraction, and a one-year suspension of the state sales tax on diesel fuel.

The budget includes $38 billion in state reserves, as well as a $49 billion discretionary surplus.

Additionally, some budget trailer bills make policy changes that have little relation to the budget but were paired with small appropriations to allow them to be expedited through the process. These include a change in the order that measures will appear on the November ballot – listing the Legislature’s proposed constitutional amendment on abortion first – and a new policy of allowing non-attorneys to serve as administrative law judges at the Office of Tax Appeals if they agree to an ethics standard (created by the agency) and have “knowledge and experience with regard to the administration and operation of the tax and fee laws of the United States and California.”

Two weeks ago, legislators approved SB 154 (Skinner), an approximately $300 billion budget that legislative leaders acknowledged was not the final budget. Closed-door negotiations continued between Newsom and Democratic legislative leaders over key provisions.

The compromise proposal was unveiled this week and quickly approved by both houses after brief public hearings that provided broad outlines of the provisions.

Newsom signed SB 154 on June 27, and both houses met June 29 to approve the revisions agreed upon by the governor, Assembly Speaker Anthony Rendon, and Senate President Pro Tem Toni Atkins. Newsom signed 29 budget bills June 30 to put the new spending plan in place just in time for today’s start of the 2022-23 fiscal year.

The centerpiece of the deal, AB 192 (Assembly Budget Committee), will provide targeted “tax rebates” up to $1,050 to California residents. The bill, signed by the governor this week, authorizes one-time payments to taxpayers with income below $250,000 ($500,000 for joint filers). The amount of the payments depends on income. The payments are expected to be dispersed in October – just as Californians begin voting in the November general election.

The “rebate” is a major change from Newsom’s original proposal of $400 payments to registered car owners, along with a “gas tax holiday” that would have suspended today’s increase in state excise taxes on gasoline and diesel. Rendon and Atkins proposed sending $200 to Californians with income below $250,000, as well as to their dependents.

Assembly Republican Leader James Gallagher said the Democrats should have approved his party’s plan to provide immediate tax relief by suspending the state excise tax on gasoline – a proposal that would save motorists 53.9 cents per gallon (under the rate that took effect this morning).

Both houses also approved AB 194 (Assembly Budget Committee), which will suspend the state sales tax on diesel fuel from October 1, 2022, through October 1, 2023. Additionally, the bill contains numerous changes to existing tax programs, including extending the California Competes Tax Credit until 2028 and authorizing the Governor’s Office of Business and Economic Development (GO-Biz) to consider taxpayers’ willingness to relocate jobs to California from a state deemed by GO-Biz to have laws that restrict abortion or discriminate against LGBTQ+ individuals. The bill additionally brings California into full federal conformity under the Paycheck Protection Program, and requires the Franchise Tax Board to administer a personal income tax penalty abatement program to provide relief to taxpayers who previously were not required to file a California return.

The budget includes a small payment to the federal government to partially repay the loan to the state’s Unemployment Insurance Fund. Newsom originally proposed spending $3 billion over two years to repay debt in the fund, which is projected to end 2022 with a $19.3 billion deficit, but the compromise budget includes only $250 million to pay down the loan, along with $500 million targeted to assist qualified small businesses that will be hit with higher payroll taxes triggered by the outstanding loan. The Democratic leaders and Newsom said they have agreed to make an additional $750 million loan repayment in the next budget. Payroll taxes for all employers are set to increase January 1, 2023, and will remain at the highest level until the debt is repaid.

The lithium extraction tax in SB 125 (Senate Budget and Fiscal Review Committee) will be levied at rates that increase with the amount of lithium extracted. The tax rate would be capped at $800 per metric ton of lithium extracted in the state. Additionally, the bill specifies that a lithium extraction site is a “mining operation” for tax purposes, increasing a producer’s tax burden.

The budget also includes a tax reduction – a suspension of the state cannabis cultivation tax. The legislation requires the California Department of Tax and Fee Administration to adjust the excise tax on cannabis every two years by a rate that would generate revenue equivalent to what would have been collected by the cultivation tax.

The budget continues funding the High-Speed Rail Authority, allocating $4.2 billion while also creating the independent Office of the Inspector General to audit the agency and provide oversight. The budget requires the agency to prioritize the completion of the Merced-to-Bakersfield segment of the high-cost rail system, which is years behind schedule and billions of dollars over budget.

A Department of Finance bulletin released June 27 reported that general fund tax receipts for the first 11 months of the 2021-22 fiscal year were $200 million above the forecast included in Newsom’s May revision of his 2022-23 budget proposal.

Tax revenue in the month of May was $1.1 billion above the forecast of $12.08 billion, “driven by higher proceeds from sales and use tax and corporation tax,” the Department of Finance reported. Personal income tax cash receipts to the general fund for the first 11 months of the fiscal year were $1.12 billion below the May forecast of $131.49 billion.

Corporation tax cash receipts for the first 11 months of the fiscal year were $592 million above the forecast of $34.84 billion.

The Assembly and Senate began their summer recesses at the conclusion of yesterday’s floor sessions, and are scheduled to reconvene August 1. The two-year session will end August 31.