CA Budget: Impact on Business

With Gov. Brown’s unveiling this week of the May revise, it is clear there remain significant and difficult financial decisions that face CA despite the recent unexpected $2.5B surge in tax revenue.For business – and issues BizFed champions – there are some interesting points we highlight here for your easy reference in the weeks ahead as our state electeds now try to reach a deal:

• Instead of proposing complete elimination, the Governor now proposes retaining Enterprise Zones with a series of reforms to ensure tax credits are limited to the hiring of new workers only. (BizFed’s Board opposed elimination and had called for reform and compromise.)

The California Association of Enterprise Zones President Craig Johnson issued a statement late Monday including: “While we appreciate the governor’s effort at saving the program in his May Revise budget proposal, we are concerned that this will undermine the intention and benefits of the Enterprise Zone program, which is to provide stable jobs to residents in disadvantaged communities – many of whom have significant barriers to employment.  The governor’s current proposal undermines the legislative intent and integrity of the program, thereby worsening the state’s future fiscal health and threatening to put more people back on government-funded services.”

• Higher income tax rates would be extended for 4 years rather than the 5 initially proposed. Would take effect in 2012. The increased income tax rate is 0.25.

• Higher sales taxes and vehicle fees - due to expire June 30 – would both be extended 5 years. (The Governor suggested legislators could extend all of the taxes and then voters would be asked - “likely” in the fall - to ratify the move.)

The increased vehicle license fee is now up from 0.65 percent to 1.15 percent; the sales tax increase is 1 percent. If approved, some of the revenue from the sales tax and vehicle license fees would go to local governments.

• Still includes elimination of Community Redevelopment Agencies – which BizFed strongly opposes. (See our Action Alert at www.bizfed.org/alerts). The CRA and League of CA Cities are sponsoring SB286 (Wright) that would redesign aspects of redevelopment law to increase accountability as an alternative to elimination. BizFed’s Board is set to consider support for that bill at its May 24 meeting.

• Reduces the state’s workforce by about 5,500 positions and eliminates 43 state boards and commissions – with “more to come.” (BizFed has supported streamlining state government). Guards and other correctional workers whose jobs would be eliminated as the state transfers responsibility for low-level offenders to counties. Among the other cuts would be 746 Department of Labor jobs, 270 in the Department of Business, Transportation and Housing, 263 in General Administration and reductions from the closure of 70 state parks.

Boards and Commissions targeted by the Governor include nine advisory and review panels at the state Department of Fish and Game, the Rural Health Policy Council, the California Postsecondary Education Commission, the Office of Gang and Youth Violence Prevention, the Commission on the Status of Women and the California Anti-Terrorism Information Center.

• Because of Proposition 98, the state's minimum school-funding guarantee, schools will automatically receive about 40 percent of the new revenue. That would increase K-12 funding by about $3 billion above the original proposal but would still keep them below the level they were at three years ago.

• Requires companies to use the single-sales factor (paying taxes solely on the share of sales in CA) in determining state tax calculations.

• Creates a sales-tax exclusion for business equipment purchases beginning in 2012-13.

• Increases the size of the tax credit for hiring and expands it to firms with up to 50 employees.

THE BOTTOM LINE
• The Governor still needs at least four Republicans, two in the Senate and two in the Assembly, to gain the two-thirds vote needed to approve extending the taxes. 

o Republicans generally have said that the improving tax revenue situation indicates CA does not need to extend any taxes. Senate Republican Leader Bob Dutton (Rancho Cucamonga) and Senate Budget Vice Chair Bob Huff (R-Diamond Bar) issued the following statement Monday in response to the May Revise: “Senate Republicans believe Governor Brown is moving in the right direction by making education and law enforcement funding a top priority. We also applaud the governor for embracing Republican proposals of paying down state debt and providing some job-creation incentives. ….But the May Revise goes too far on taxes and not far enough on reforms. …With $6.6 billion in new revenues, Republicans are right - we don't need, and it's ridiculous to ask voters for, five years of new taxes.”

• Controller John Chiang has said CA will run out of money by July if lawmakers and Brown can’t agree on a budget. The state would then pay its bills with IOUs, which could drive down the state’s credit rating and push borrowing costs higher.

• For the first time ever, legislators won't get paid if they miss the June 15 budget deadline, under new rules approved by voters last fall in Proposition 25.

• Gov. Brown and GOP leaders are working on a grand compromise that could involve Brown agreeing to big reductions in state employee pensions and a spending cap, something he said today he supports, in exchange for placing the tax extensions on the ballot this fall or next spring.