How Should We Judge The Budget

February 14, 2009

The California Budget Project was founded with a belief in two basic premises. First, and perhaps most important, that the long-term interests of California are best served when all Californians, and particularly underrepresented communities have a voice in critical budget and policy debates. And second, that there’s an integral connection between the spending and revenue sides of the budget. The proposed budget, and the process by which it was developed, violate both of these principles.

For weeks, we’ve been saying that there would be no winners in the current negotiations over the state budget, but we were wrong. The San Jose Mercury News reports that at least one Silicon Valley leader is claiming victory, “‘All good things come to those who wait,’ said Carl Guardino, president and chief executive of the Silicon Valley Leadership Group. ‘ This potentially is a huge win.’” The win is the $700 million-per-year massive corporate tax cut we blogged about earlier this week and that would be in addition to tax breaks contained in the 2008-09 budget agreement approved in September that will cost nearly $1 billion per year at full implementation that we’ve also written about here. Two temporary tax cuts – a proposed two-year hiring tax credit and a five-year tax credit for film and television producers – would increase the cost of the tax cuts to $1 billion per year. To bring these numbers into perspective, let’s look at what $1 billion per year means in state budget terms:

- $170 for every student in California’s public schools;

- Enough funding to restore proposed 2009-10 cuts to higher education, In-Home Supportive Services, and services for people with developmental disabilities and to provide a cost-of-living adjustment for families in the CalWORKs Program; or

- Almost as much as the General Fund’s portion of the proposed increase in Vehicle License Fees ($1.2 billion).

In today’s Los Angeles Times, Evan Halper compares the winners and losers in proposed budget’s tax changes.

Perhaps the best way to close is with a third premise that underlies the mission of the CBP, that budgets are all about values and priorities. And that’s the standard by which we hope our elected officials and all Californians will judge this and all budgets that come before them.

– Jean Ross

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Cap Details Emerge

February 12, 2009

Slowly some details of the budget “framework” are beginning to emerge. The Los Angeles Times reports that the gap would be closed by $15 billion in spending reductions, $14.4 billion in new and increased taxes, and $12 billion in new borrowing and various accounting gimmicks. Approximately half of the proposed cuts could come from schools and community colleges. Human service and higher education programs could also be deeply cut. 

Elements of, but no legislative language describing, the proposed spending cap have also begun to trickle out. A CBP analysis based on “best available rumors” concludes the cap, if approved by voters, could severely limit the state’s ability to restore budget cuts made in the September or current budget plans and could make it extremely difficult to expand programs to meet future policy, demographic, and economic challenges. Of course, that’s precisely what such a cap is designed to do – limit future spending.

Specifically, the CBP analysis estimates that state General Fund spending could be limited to approximately $21 billion below the Governor’s baseline spending level in 2012-13 – a level that assumes all of the cuts proposed by the Governor as part of his plan to balance the 2008-09 and 2009-10 budgets. In other words, some $21 billion in cuts above and beyond those currently under consideration could be required under the proposed cap. While some claim the cap could be less harsh, they have not provided the documentation required for an independent assessment. While we trust, we also firmly believe in the need to verify. Details to come as we learn them.

Late breaking news suggests that the cost of the tax cuts that appear to be part of the budget package could be much larger than initially reported – likely at the high end of the estimate reported in a prior blog post.

 – Jean Ross

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Budget “Framework” Emerges

February 11, 2009

Speaking at the monthly luncheon of the Sacramento Press Club, Senate President pro Tem Darrell Steinberg said that the “Big Five” had agreed on a “framework” but that contrary to some press reports, there was no “deal” on the budget. Steinberg stated that he was committed to honoring the “cone of silence” that has descended over budget negotiations and provided virtually no information on the contents of the emerging framework.

Careful listeners could glean that the “framework” includes a new limit on state spending and no permanent tax increases. In response to a question as to what taxes would be increased, Steinberg answered that the reporters who had written about the issue in the Los Angeles Times and the Sacramento Bee were “good reporters.” These stories suggest that the deal would include a 1 cent increase in the state’s sales tax rate, a 12 cent per gallon increase in the gasoline tax, a doubling of the Vehicle License Fee rate – although the new rate would remain lower than the pre-late 1990s tax rate – and a 0.25 percentage point personal income tax surcharge. The duration of the tax increase would depend on whether voters approve the proposed limit on spending. If voters approve the limit, the new taxes would stay in effect five years. If voters turn down the cap, the new taxes would sunset in approximately two years.

Steinberg also essentially confirmed that the framework includes a large corporate tax cut, such as the one we blogged about in our last post and that Sacramento Bee columnist Dan Walters wrote about in his morning column. Steinberg stated that a vote on the framework was expected sometime in the next several days.

– Jean Ross

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Giving It All Away

February 9, 2009

While budget negotiations remain under the cone of silence, there are increasing signs that the as-yet-to-be-agreed-upon or announced deal may include a massive tax cut for the state’s largest and most profitable corporations. There are signs that lawmakers may include a change to the formula corporations use to determine how much of their income is subject to taxation in California in the budget deal. Since details of changes under consideration have not been made public, it is unclear whether lawmakers are considering a proposal that would let corporations choose one of two methods for apportioning income to California or a version that would require all corporations to use the same formula. The first option could result in a multi-billion dollar per year revenue loss, while the latter could result in an annual loss in the range of $700 million to $1 billion.

 Several measures containing the “have it your way” approach have been introduced in recent years, most recently in the “dead of night” tax deal passed by the Assembly as part of budget negotiations in 2007, but later blocked by the State Senate. Assemblymember Fiona Ma authored AB 1591 in 2007  and AB 2114 in 2008 that would have codified this approach, as did AB 1037 (Frommer) of 2005. At full implementation, AB 2114 would have reduced corporate tax revenues by $3.0 billion according to estimates prepared by the Franchise Tax Board. A 2006 CBP analysis reviews the policy issues raised by this approach.

The inclusion of a massive tax break as part of a budget deal aimed at closing a $40 billion budget shortfall raises obvious questions. First: how would the lost revenues be paid for? Long-term budget forecasts published by the Department of Finance  and Legislative Analyst  show the state facing red ink as far as the eye can see; thus, any tax cut would dig the state into an even deeper hole in the future. A second question is whether large corporations deserve another tax break on top of the billion a year cut included as part of the 2008-09 budget package. Last, but not least, is whether the proposed tax break would be the best use of hundreds of millions to billions of dollars at a time when deep cuts are proposed to public education, programs for the elderly and people with disabilities, public transit, and virtually every other area of state spending. Our guess is that in a fair and open debate, the answer would be a resounding no. And that’s why this proposal deserves a little sunshine. 

– Jean Ross

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Another Urban Legend

February 5, 2009

A recent comment on our blog post reminded us of a persistent, but factually incorrect, rumor frequently heard in state policy circles – that rich people are leaving California in droves for states with lower personal income tax rates. Curious to find out whether this was actually true, CBP staff dove into data provided by the IRS showing the incomes of Californians who stayed, moved into, or moved out of the state from 1995 to 2007. What we found was that taxpayers who left the state actually made less on average than those who stayed. Those leaving the Golden State in 2006-07 had an average adjusted gross income of $55,907, while those staying had an average adjusted gross income of $67,722.

The CBP also looked at what happened following the passage of Proposition 63 in 2004. As you may recall, Proposition 63, dubbed “the millionaire’s tax,” imposed a 1 percentage point income tax rate on personal incomes over $1 million to fund mental health programs. The CBP examined Franchise Tax Board data before and after the implementation of Proposition 63. We found that the number of millionaire taxpayers increased significantly after the passage of Proposition 63. Between 2004 and 2007, there was a 48.6 percent increase in the number of tax returns filed by taxpayers with adjusted gross incomes of more than $1 million. In contrast, the total number of taxpayers in the state increased by 8.6 percent during the same period. While we certainly don’t claim that high-income earners moved to California to pay the higher tax rate, there is also little evidence to support the claim that they are leaving to avoid paying the higher rates.

There will always be people of all income levels moving to and from California. But preliminary CBP research shows that the rumor that the wealthy are leaving California is just another urban legend that deserves to be dispelled.

– Jean Ross

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