Democrats in Sacramento praised the approval of a “balanced” and “on-time” budget. A prepared release from Assembly Speaker Toni Atkins, D-San Diego, says Assembly Bill 93, the budget bill, will “pay down debt, build reserves and restore funding to schools.”

“I want to thank our Budget Chair, Dr. Shirley Weber, our subcommittee chairs, the members of the Budget Committee and our conferees for performing an incredible amount of work, which is shown in the budget we voted on today,” said Speaker Atkins. “The stability from the years of hard choices gives us an opportunity that has been rare in recent years – the chance to focus on a budget that builds a stronger and brighter future for the people of California.”

Assemblyman Mike Gipson, D-Carson, released the following statement on the passage of AB93:

“I’m proud to support a balanced budget that prioritizes education, health care, and poverty reduction in California. By strengthening social programs to assist the disadvantaged, such as early education and the Earned Income Tax Program, more Californians will have the freedom to follow their own path to success and happiness. This budget will also help create healthier communities by restoring funding cuts to critical Medi-Cal programs. … Overall, these policies outline the virtues of a society concerned with creating the broadest opportunities for all of our citizens.”

Senator Connie Leyva, D-Chino, also commended the budget approval, calling it a “forward-looking budget that continues to strengthen California’s diverse communities … throughout the state.”

Democratic legislators highlighted the importance of investment in the Earned Income Tax Program, health care and Medi-Cal, state education at all levels of learning, public safety, child care and other programs. Senator Tony Mendoza, D-Artesia, said the budget “reflects the Legislature’s priorities of investing in the people of our great state … while paying down the state’s long term debt and setting aside more resources for our rainy day fund.”

But Republican legislators fear the budget does not do enough to meet the needs of California’s unfunded pension and retiree health care liabilities.

Senator John Moorlach, R-Costa Mesa, said on the Senate floor that the budget “departs from Governor Brown’s call for fiscal restraint” and does not “make a dent in our $72 billion in unfunded retiree medical costs, or the over $100 billion [plus] in unfunded pension liabilities.”

Senator Patricia Bates, R-Laguna Niguel, said the budget “gives a false sense of security to Californians.” Despite providing more resources for education, “it creates new and additional spending in other areas, which is simply unsustainable” and “may lead to higher taxes.” Her release continued:

“The undeniable fact is that this budget would spend a record $269 billion, which is $15 billion higher than last year’s budget. It also promises money that may never materialize as it assumes that the state will receive $3 billion more than what Governor Brown believes we will receive. That’s why he has not agreed to this budget. He recognizes that it repeats the foolishness of relying on rosy economic projections.

“Governor Brown has governed during times of both boom and bust, and I hope he will resist the urge to live beyond our means. By paying down more debt and smartly investing in top priorities such as education, we can avoid major problems down the road and secure a healthier future for all Californians.”

The Republican vice chairs of the Assembly and Senate budget committees, Assemblywoman Melissa Melendez, R-Lake Elsinore, and Senator Jim Nielsen, R-Gerber, also sent a formal letter to the governor, calling the proposed budget a “political exercise” and saying adoption of the budget would be “fiscal malpractice”:

“The needs of the state are great and the urge to spend is strong. As you have noted, however, a moderate economic downturn could cut state revenue by $40 billion over three short years. In assessing the health of the state’s economy, economists have suggested that California is not even prepared for a moderate recession. While our work to build a Rainy Day Fund is commendable, the Fund is only projected to have a $3.5 billion balance as of next summer. We should not delude ourselves into believing that $3.5 billion would be sufficient to smooth the effects of a significant economic tremor.”

According to charts from the Department of Finance, actual expenditures for fiscal year 2011-12 were $86.4 billion. As state revenues increased, that number has ballooned to $96.6 billion in FY 2012-13 and $99.8 billion in FY 2013-14. The proposed budget for FY 2015-16 is $117.5 billion – that’s about $17.7 billion dollars more than just two years ago.

The estimated revenue for the general fund in FY 2015-16 according to the Gov. Brown’s May Revise is $113.3 billion, which is less than the Legislature’s proposal to spend $117 billion and save $5 billion.

Gov. Brown and the Legislature will continue to negotiate and work out any discrepancies until the beginning of the fiscal year on July 1. The proposal now goes to the governor to sign and approve.

Photo credit: 401kcalculator.org

With a big tax surplus flowing into state coffers, California shattered records last year with a historic haul dwarfing those of other large states around the country. This year, meanwhile, legislators planned still further increases.

“During the 2013-14 fiscal year that ended last June,” the Sacramento Bee reported, “California collected $138.1 billion in taxes of all kinds, 16 percent of all state taxes collected in the nation and more than the next two states, New York and Texas, combined.” The majority of the sum came from personal and corporate income taxes, according to the Bee.

Money maze

At first blush, California’s cash-in promised straightforward results. “Through the end of March, state general fund revenue was about $1.3 billion ahead of projections,” Jason Sisney, California’s chief deputy legislative analyst, told the San Francisco Chronicle. “April revenue is likely to add at least $1 billion more than projected.”

But thanks to the Golden State’s arcane fiscal requirements, revenue was set to be apportioned in counterintuitive ways:

“Under the state’s budget formulas, ‘virtually all or more than all of the additional revenue, relative to projections, may be required to go to schools and other statutory and budgetary commitments, such as the state’s rainy-day fund and debt payments,’ Sisney said. As a result, ‘The amount of extra state money available for other purposes could be little or nothing, and in some scenarios, reducing non-school spending on programs could be required.'”

Tax watchers, the Chronicle noted, paid special attention to a surge in taxes amassed through payroll withholding. In a report cited by the Chronicle, Standard & Poor’s called the increase “a sign that California’s economy is firing on all cylinders.” But that interpretation did not extend to the Golden State’s self-employed economy, since entrepreneurial taxpayers don’t have their taxes withheld in advance by an employer.

New hikes foreseen

Despite the influx of revenue, legislators have not been satisfied with tax rates. Assembly Bill 464, introduced by Assemblyman Kevin Mullin, D-South San Francisco, “would give local governments the power to add another 1 percent to the combined state-local sales tax rate with voter approval,” the Bee reported.

Senate Bill 16, meanwhile, introduced by state Sen. Jim Beall, D-San Jose, would hike several of California’s car-related taxes and fees. “The measure would increase the state gasoline tax by 10 cents per gallon, raise the state vehicle annual registration fee by $35, and levy a $100 per year surcharge on zero-emission vehicles that don’t use gasoline,” The Bond Buyer noted. “Beall’s plan also would phase in a 3.5 percent increase in state vehicle license fees over five years.”

On at least one issue where elected officials remain divided, the prospect of higher taxes has deepened. Although the push to legalize marijuana in California would presumably bring more tax revenue to Sacramento, Colorado’s uneven experience with the process has led to increasing reticence among Californians who don’t want to struggle with similar problems. As CalWatchdog noted previously, Coloradan legislators have divided over what to do with the excess tax revenue.

Up in smoke

The indirect tax consequences of legal marijuana could also mount. At a recent panel convened by the Northern Californian chapter of the ACLU, “Paul Gallegos, a former district attorney in the marijuana-growing heartland of Humboldt County, noted that a pot plant needs 6 gallons of water each day over its 150-day growing cycle,” according to ABC News. Amid California’s protracted drought, water rates and rationing penalties could be dramatically effected.

Finally, more comfortable on more familiar ground, some legislators have re-trained their attention on increasing taxes on tobacco products. State Sen. Richard Pan, D-San Francisco, “wants to raise California’s tobacco tax by $2 a pack, to bring in $1.5 billion a year for smoking prevention and smoking-related medical costs now borne by taxpayers through Medi-Cal, the state’s healthcare program for the poor,” the Los Angeles Times reported.

By Dave Roberts

Hold on to your wallet — Sacramento may be hatching yet another way to reach into your pocket: a state sales tax on services. Assemblywoman Alyson Huber, D-El Dorado Hills, has authored AB 1963, which calls for a study of the revenue impacts of a service tax.

Huber said she’s looking for a way to reduce state tax revenue volatility. Boom and bust economic cycles have had state revenues skyrocketing and diving for several decades. But some fear that placing a new taxing tool in the hands of Democrats will lead to increased taxation in this already highly taxed state.

“The bill started out as raising the issue of extending sales taxes to services as a way of diversifying the pot,” Huber told the Assembly Revenue and Taxation Committee on May 7. “AB 1963 seeks to at least get the Legislative Analyst’s Office (LAO) involved in doing an analysis of California’s revenue system to help come up with a solution on volatility. It is an issue I talk about in my district a lot, about how in California we have these huge peaks and then deep recession on our revenue side. If I were your investment advisor and your investment portfolio looked like California’s revenue stream and was going like this [waves her arm up and down] on a cyclical basis, I would tell you to diversify, that you are too susceptible to risk.”

Fluctuating State Revenue

About half of the state’s general fund revenue comes from income taxes, which disproportionately fall on upper incomes. During good economic times, like the dot-com bubble in the late 1990s, income tax revenue flowed like a tsunami into state coffers, accounting for 57 percent of total revenues in 2000-01. But when the bubble popped, income taxes fell to 48 percent in 2003-04 when the bubble popped. During the recession in 1979-80, income taxes accounted for just 37 percent of total revenues.

The other two main sources of revenue are corporate taxes, which also can swing wildly with the boom-and-bust cycle, and sales taxes, which are also affected — people buy fewer cars during recessions — but are generally less volatile than the other two revenue sources, according to the LAO.

Friday’s LAO report on Gov. Brown’s budget revision describes the uncertainty in tax collection: “Economic and revenue forecasting is very difficult now due to a variety of issues, including uncertain federal fiscal policies, difficulties in forecasting recent corporation tax policy changes, the usual issues of stock market volatility, and Facebook. Given these forecasting challenges, state leaders should not be surprised if 2012-13 state revenues end up several billion dollars lower (or higher) than current projections.”

Increasing Revenue by Increasing Taxes

Huber said she’s attempting to find a bipartisan solution to the tax revenue problem.

“The problem we have is a political one,” she said. “And that is generally when the folks on the left talk about our revenue side, it’s to talk about getting more revenue. And the folks on the right, when we talk about our tax system, promise no new taxes ever. And if we can’t get past that political problem, then we can never achieve a solution on our revenue volatility in California.

“So my suggestion is that the LAO look for a way that would be revenue neutral, wouldn’t actually try to increase the pot, but would diversify the existing tax structure so that we could make California’s revenue stream look more like California’s economy. In California right now, our economy is growing to a $2.1 trillion economy and our revenue line has gone down. And that kind of disconnect between our economy and our revenue causes a lot of the huge deficits that you see right now.

“The good years are not so good either. Because when we have those huge peaks in revenue … people tend to spend a lot more, and they build spending in as if that money is going to continue. And then we have to turn around and cut to make up for that. At this point we all generally agree what the problem is. What we don’t agree on is how to get the solutions. So let’s have an in-depth analysis from the LAO and see if we can do something to fix this revenue volatility in California.”

The Argument Against Raising Taxes

Speaking in opposition to a tax on services was Therese Twomey, fiscal policy director for the California Taxpayers Association, who said, “It puts California businesses at a competitive disadvantage. It hurts lower income businesses, families and communities. It also moves jobs out of state.”

Parke Terry, legislative advocate for the California Landscape Contractors Association, is not opposed to the bill, but he is concerned that taxing services will cost the government money.

“Probably the biggest purchaser of construction services in California is state and local government,” he said. “It’s not well known that state and local government currently pay sales tax on materials that go into construction projects, but they do not currently pay sales taxes on the labor component of that construction. So we think the bill, in that context, significantly increases the cost to state and local government.

“When the Board of Equalization looked at this issue about three years ago, they determined that the largest single economic segment in California that would be subject to a sales tax on services is actually advertising and marketing. Just like attorney services, those are jobs that could easily be exported to other states. We are certainly not opposed to looking at it. But we think there are a lot of issues here that you need to consider before you seriously think about expanding the sales tax to services.”

Differing Republican Opinions

There may be some bipartisan support for AB 1963 if Committee Member Brian Nestande, R-Palm Desert, is any indication. He believes taxing services will help California if overall revenue remains neutral and if exemptions are carved out for business-to-business services and for low-income residents.

“I don’t think Ms. Huber is suggesting just a tax on services in a vacuum, not having lowered the rate to income taxes, to the current sales tax, so you have a lower rate overall,” said Nestande. “This is what all the economists say: we should move to a different taxing system. It’s almost unanimous, at least from the ones I’ve talked to.”

But not every Republican Assembly member is confident that the addition of a new tax in California won’t lead to an increase in overall taxes and more businesses leaving the state.

“The problem that I have since I’ve been here since 2008, the only bills that I’ve ever seen with any kind of change in tax policy, the goal has been to increase revenue,” said Diane Harkey, R-Dana Point. “Businesses are not sure right now if they are going to survive. Studies are all good. But I really do believe that there is going to be leakage just on the mere mention of the possibly of a change in our tax code. Because there’s so much uncertainty. I have a feeling that, when the study comes, we will pick and choose those items that will conceivably generate revenue rather than increasing employment.”

Democrat Legislators Hungry for More Revenue

Harkey’s fears were immediately confirmed by Gilbert Cedillo, D-L.A., who is salivating at the prospect of bringing in and spending more tax revenue.

“I have been here a little bit longer,” he said. “When I got here we had an economy of $1.4 trillion. We were spending about $100 billion on services. That was our budget. Today we are at $2.1 trillion and we spend $85 billion. So, while it may seem that we were going in one direction, the fact of the matter is we have cut 15 percent in taxes. They had gone up above $100 billion, but we are down to $85 billion in services for a state that’s growing. And for a state whose infrastructure that business relies upon is in tremendous need of reinforcement, our waterways, our highways. The entirety of the services that we provide for businesses need upgrades. It needs an educated and stable workforce. So the question for me would be also what is revenue sufficiency.”

Huber agreed that, in addition to leveling out the revenue peaks and valleys, state government needs to bring in more money.

“In revenue neutrality I’m not talking about a spending cap,” she said. “Generally, when people talk about those it’s only enforceable when you have a constitutional amendment. As a budget item, it probably would be gone the very next year. But I’m talking about something that is a rational relationship between the size of our economy and the size of our spending.

“We are not trying to starve the very economy that we would like to see grow. But we are the government and the people who try to make sure there are resources to educate the population, to do the roads and bridges, to have the infrastructure. If we have those additional resources as our economy grows, that makes sense. But having them go down the way they are now with our economy growing, that doesn’t make sense. And that’s the problem we are trying to fix by having this study bill.”

The committee passed the bill 6-0, with Harkey and two others not voting. It will next be reviewed by the Assembly Appropriations Committee.

However, this isn’t being done without a cost – over the past two years, the CHP has been implementing overlapping 12-hour shifts, reported the Bee. I’d like to see the overtime hours for the CHP compared with the increased number of traffic citations – I am betting that both overtime pay and traffic tickets are on the rise. And I’d like to see just how many of those tickets are issued on time-and-a-half or double-time, and who is authorizing that overtime.

“The California Highway Patrol is handing out more traffic citations than it did a few years ago, and that has generated tens of millions of dollars in new revenue for state and local government,” the Bee reported, using data from the CHP.

Once again, the working class and lower-income folks are paying the bill. And advocates for drivers say traffic enforcement all over the state is on the rise.

If this is true, then according to the police departments and CHP which claim they have had to cut staff with the budget crisis, they are achieving this revenue windfall with fewer employees, and probably could have done this all along.

In Oakland, the police department has learned to do more with less. “Overall,the department’s officer ranks shrank from 837 in November 2008 to 660 now due to layoffs and attrition,” the story said. And, as cities rely more on red-light cameras to do the work for them, violations have increased.

But, a lack of enforcement of laws is one of the biggest gripes voters have – not that we want more traffic citations, but thousands of laws are passed and never enforced — that is, unless revenue is attached, and even then it happens erratically, vindictively and resentfully.

Police departments around the state have been quite dramatic about budget cuts, as if public safety shouldn’t have to tighten up budgets the way everyone else is forced to do. There’s just as much waste in public safety as in other government agencies.

The CHP and other police officials claim that their sole concern is safety.  And they report that they are currently putting more officers on the street, despite cutting staff.

Why haven’t police done this all along if safety is really the primary concern? While the number of expired registrations and unpaid tickets may have gone up during the economic crisis, bad drivers didn’t just increase when the budget crisis hit California.

Revenue is a powerful motive – the state wants more, police departments want more, and employees want overtime. It’s a win-win… for everyone but drivers.

APR. 1, 2011