EZ Policy Blog

From SanDiego.com:

By Eilene Zimmerman

Grappling with a $20 billion deficit isn’t easy. The California Legislature has put just about everything on the chopping block, including Medi-Cal, college and university funding, public education and prisons. So it’s not a huge surprise that the latest suggestion from the California Legislative Analyst’s Office is to cut the California Enterprise Zone program.

An Enterprise Zone is a defined geographic area that is economically disadvantaged, and businesses that locate there qualify for a variety of financial breaks, like tax credits on the wages paid to new employees, a tax credit for sales taxes on purchases of manufacturing equipment, exemption from certain city fees and more.

San Diego’s first Enterprise Zone was established in 1986. It eventually became two different Enterprise Zones—the Metropolitan Enterprise Zone and the South Bay Enterprise Zone. In 2006, the two were merged and enlarged to become the San Diego Regional Enterprise Zone, expanding beyond the city limits to include parts of Chula Vista and National City.

What that’s meant to the region is some 25,000 jobs in economically depressed communities and more than $1 billion in investment, says San Diego city councilmember Todd Gloria.

“In my district, it’s been helpful in attracting and retaining businesses in communities like North Park and City Heights,” says Gloria. “The tax benefits are significant.”
Cutting funding of the Enterprise Zone program wouldn’t mean redrawing boundaries to make the zone smaller but would instead lessen the incentives that get new businesses to locate within these communities in the first place. Gloria says one of the biggest benefits of new business is that they employ locals who live in the neighborhood.

“We want to continue to have those jobs during a period like this, when there is really high unemployment,” he says.

There are benefits even beyond jobs. Putting new businesses in an economically disadvantaged or blighted community helps restore that community, allowing for redevelopment and renewal.

“If they cut incentives for businesses in Enterprise Zones, what is left for people in these communities who want to be working, supporting their families?” asks Gloria. “What happens to urban renewal?”

Ruben Barrales, president and CEO of the San Diego Regional Chamber of Commerce, understands that state legislators are between a rock and a hard place. But Barrales also finds it ironic that in the worst recession in modern history—where unemployment in the state exceeds 12 percent—the government is considering cutting a program that helps create jobs in areas where economic stagnation hits hardest.

“These are businesses that often provide jobs for blue collar workers in San Diego, and we are losing a lot of those jobs generally anyway,” says Barrales. “Anything we can do during this recession to help small businesses and manufacturers stay in business and hire people is a benefit to the region’s economy.”

Barrales hasn’t given up hope. Does he expect Enterprise Zone cuts when a budget fix is finally agreed upon?

“That’s the $1 billion question,” he says. “My expectation is that the process will drag out until the summer. We need a budget fix that the Assembly and Senate can agree on, and one that the governor will also sign. I hope they won’t cut the program; it would be taking a short-sighted view of the future.”
Instead, says Barrales, legislators should take the long view: that the tax incentives that enable businesses to employ people now is better for California’s long-term prospects than any short-term fix.

About the author: Eilene Zimmerman is a journalist based in San Diego who writes about a variety of topics, including business, social and political issues and family life. Her work has been published in national magazines and newspapers including The New York Times, The San Francisco Chronicle, The Christian Science Monitor, FORTUNE Small Business, CNNMoney.com, CBS MoneyWatch.com, Wired, Harper’s, Salon.com, Slate.com, Psychology Today and others. She blogs at www.trueslant.com.

A colleague brought to my attention “The Business Relocation Coach” blog which claims as its mission, “to help businesses relocate and expand facilities in highly beneficial ways. This blog is maintained by JV Executive Consulting, inc., which helps design the smoothest relocation to the most desirable location that meets business goals. An experienced team serves a diverse set of clients through executive coaching for transition, relocation studies, site selection, incentives negotiation and government affairs.”

On Monday, Business Relocation Coach posted an article called, “California’s Hostile Business Climate: 100 ‘Moving-Out-of-State’ Events” in which he explains

Apparently, No state agency keeps track of enterprises that move out of California or which companies elect to expand in other states even though they are headquartered here. That lack of knowledge is quite convenient for elected officials who deny that state’s anti-business attitudes and policies hurt commercial enterprises. Hence, without a central repository, it’s difficult to determine how many jobs are lost specifically because of California’s unfriendly business environment.

In this blog, I’ve attempted to note facility moves and disinvestments in California on a catch-as-catch can basis based on incomplete media reports. Below is a roundup of activity that I’ve been able to find since I started this blog in July, 2009. This imperfect and incomplete list of 100 moving-out-of-state events is the “tip of the iceberg” about the loss of commercial enterprises in California.

Just some random examples:

Alza Corp. in 2007 eliminated about 600 jobs in drug R&D while also exiting its Mountain View, Calif., HQ. At the time the company said that its 1,200-person Vacaville facility will continue to operate. But the Vacaville Reporter on Oct. 23, 2009 revealed that the plant is being offered for sale by J&J, its parent company. It’s unclear if more layoffs are in the facility’s future.

Audix Corporation relocated from Redwood City, Calif., and to accommodate growth moved to a 78,000-square-foot facility in Wilson, Oregon.

Buck Knives after 62 years in San Diego moved to Post Falls, Idaho.

EMRISE Corp. completed its HQ move from Rancho Cucamonga to Eatontown, NJ, in May 2009. The company said the move “will result in additional annualized cost savings of approximately $1 million and facilitate improvements in operating efficiency. . . . The cost savings associated with relocating our corporate headquarters will start immediately. . . The aggregate total of these expense reductions will increase our profitability and cash flow in this and succeeding years and, over time, substantially improve our ability to further reduce our long term debt.”

Facebook, based in Palo Alto, will expand in a major way in Oregon by locating a custom data center in Prineville. It will be a 147,000-square-foot facility costing $180 million and will employ 200 workers during construction and another 35 full-time once operating in 2011.

He has 100 of these examples. The list was also featured in the Orange County Register.

As an aside, regarding the point about no government agency keeping track of businesses that leave the State, take a look at the campaign website for Damon Dunn, running for California Secretary of State. Under “Solutions,” Dunn wants to address this problem:

The Secretary of State is responsible for all the business filings in California. As Secretary of State, I will use my business experience to evaluate which companies are leaving the state and why. I will then report my findings to the Legislature as part of a package of reforms that will lead to job growth in California.

California, like every other state government, has been looking for solutions to problems that have developed as a result of the economic recession.

The Secretary of State’s office needs to be using the information it holds to be an advocate for jobs in the state. I will use my office to focus attention on the businesses that are being stolen from California by Texas, Utah, and other western states. When the Governors of other states are personally calling business leaders in California asking them to expand outside of California we are not competitive in economic development as a state.

Here is a letter (click here to see the scan) which has been floating around the Capitol for the last number of weeks from the California Labor Federation. The letter calls on Legislators to vote “no” on any of the Governor’s job creation legislation, and uses the opportunity to make a special attack of the Enterprise Zone program:

The California Labor Federation opposes the Governor’s job creation proposal. The plan would rip off $500 million from the 100% worker financed State Disability Insurance program to fund employer grants for job training.

The financing of this jobs program must be questioned, The State Disability Insurance program is 100% financed by a tax on workers. The tax is assessed, on the social security wage base, currently over $93,000 and indexed every year. The tax rate is adjusted annually based on the fund forecast. This tax structure is progressive and responsive and is the reason why our SDI fund is currently at $1.3 billion.

In contrast, the employer financed Unemployment Insurance program is paid on a tax base of $7,000 in wages and a stagnant tax rate set at the federal minimum. This locked in tax rate, unchanged for nearly 30 years, is the reason why California’s UI trust fund has borrowed over $6 billion in federal funds to pay benefits.

The Governor’s $500 million jobs proposal would “borrow” $500 million from the SDI fund. It would be repaid through an assessment on employer UI taxes raising on $53 million. This proposal would:

1. Trigger a tax increase on workers to replenish the SDI fund.
2. Divert needed employer funds away from the UI fund. California must repay the $6 billion and growing loan to the federal government or face significant interest payments. UI taxes should go to fund the UI program.

Past evidence proves that these types of “borrowing” schemes leave the borrowed unpaid. Highway construction, transit, local government programs all offer recent examples of Peter still broke and unpaid after Paul took all the money.

Finally, creating new economic incentives for employers first requires a reexamination of existing employer incentive programs, such as Enterprise Zone tax credits. The Legislature has enacted such subsidies to create jobs in California. Evidence continues to pile up that Enterprise Zones create no economic benefit for the state. A June 2009 Public Policy Institute of California Study (“Do California’s Enterprise Zones Create Jobs?”) concludes, “This report finds that enterprise zones have no overall effect on job growth.”

We ask for you to vote “NO” on any legislation that enacts the Governor’s Job Creation Initiative.

Sincerely,
Angie Wei
Legislative Director, AFL CIO

I would be interested to know if the Labor representatives from Bayer would agree with these sentiments:

That video is the testimony of Union leaders to the Oakland City Council in support of expanding the Enterprise Zone to Berkeley to keep Bayer from moving out of California. The Enterprise Zone was expanded, and Bayer did decide to stay. See the whole hearing here.

The Senate Daily File includes an “Informational Hearing” on the Enterprise Zone program on February 24. The hearing is being held by Rev. & Tax. Committee Chair, Senator Wolk and will be in room 3191 at 1:30 pm.

The California Senate Majority Caucus has released the list of bills in its 27 bill “Jobs Package.” They claim that

This comprehensive bill package invests existing state and federal funds for targeted projects, expands jobs in the new economy, prepares Californians for jobs in growth industries, and provides working families with sorely needed relief.

The bill package proposes to create 140,000 jobs without raising taxes or waiving any environmental, consumer, or workplace protection laws. Further, all of the bills need only a majority vote for approval.

The California Research Bureau has concluded that a jobs package which creates 100,000 jobs creates $6.7 billion in economic activity per year, saves the General Fund approximately $2.3 billion in increased revenue and avoided costs, and results in a net increase in employment of approximately 300,000 jobs- reducing unemployment by 275,000.

The package includes SB 974 which is a direct assault on the Enterprise Zone program. The bill’s preamble says:

SB 974, as introduced, Steinberg. Income tax: credit: career pathways investment credit.

The Personal Income Tax Law and Corporation Tax Law authorize various credits against the taxes imposed by those laws.

This bill would find and declare that the deep economic recession in California requires strategic investments to educate and prepare the workforce to fuel the next state of economic growth. This bill would find and declare that if the dropout crisis is left unchecked, the rate of middle and high school dropouts will increase. This bill would state the intent of the Legislature to enact legislation to ensure that the state’s tax expenditure investments are rigorously evaluated and to establish fiscal incentives, such as tax credits, that encourage California businesses to enter into partnerships with schools to strengthen education and develop career skills.

Regarding Enterprise Zones the bill says:

(8) New research from the Public Policy Institute of California suggests that the state’s enterprise zone tax credit program has not significantly increased job creation or the employment of hard-to-hire individuals, as was intended. Two aspects of the program that were poorly designed and have produced an especially poor return on investment, Targeted Employment Areas (TEA) and retroactive vouchering, should be phased out in favor of fiscal incentives that enhance workforce development for the jobs of the future and that have a beneficial impact on high school graduation rates.

The manner of “phase out” is not specified, nor are the new theoretical incentives.

From the Sacramento Bee:

Senate President Pro Tem Darrell Steinberg today unveiled a Democratic plan he said would create an estimated 140,600 to 197,600 jobs in California.

Steinberg, D-Sacramento, said the Democratic Caucus in the Legislature is introducing 27 bills that are part of an employment plan “that is real, not partisan, not hype.”

He said every measure to be introduced can be approved with a majority vote, and that the jobs-creation ideas could have a “multiplier effect” by creating even more jobs.

“I think people want to see something tangible,” Steinberg said.

Among the proposals:

• — A fee stabilization bill for California’s higher education systems that would set a 5 percent cap on tuition fee hikes in any given year and require students to be given an estimated cost schedule for what it will take for them to finish their degrees.

• — A bill to promote the Employment Development Department’s “work-share program,” which allows hard-hit companies to keep some employees on at reduced salaries with the EDD makes salaries whole in anticipation of an economic recovery and re-hiring.

California companies are not participating much in this EDD program, according to Sen. Mark Leno, D-San Francisco, who accompanied Steinberg and is author of this bill. The state of New York promoted its program last year, increasing business participation by more than 500 percent and reducing the number of workers needing full unemployment benefits.

• — A bill to restructure the furlough polices imposed by the governor to save money. The bill would exempt employees at the Franchise Tax Board, the State Board of Equalization and those in jobs funded at least 95 percent by sources other than the General Fund.

Steinberg hopes to revive a bill that Gov. Arnold Schwarzenegger vetoed last year requiring a mandatory level of renewable energy to be purchased inside California to help create jobs. The bill last year was based on a 33 percent renewable energy goal for public and private utilities by the year 2020. Last year’s proposal would have limited renewable energy credits purchased outside California to more than 25 to 30 percent of the renewable total.

The governor vetoed the bill, saying it could increase energy costs, but Steinberg said he plans to try to convince the governor to work with legislators on reviving a version this year he estimates could create 20,000 jobs.

Other proposals include:

• — A bill to fast track renewable energy projects eligible for stimulus funds. At least 11 projects are waiting for permits from state energy agencies.

• — A bill to streamline obtaining multiple permits to start businesses by starting “one-stop” permit centers through Cal-EPA. Such agencies existed in the mid-1990s to help speed up business and job creation during a an economic downturn.

• — A bill to grant a 5 percent bid preference to a company that can certify that 90 percent of employees on a government contract will be California residents. In an average year, California spends nearly $35 billion on service and consulting contracts.

Some of the bills would authorize the spending of federal funds and bond money for projects already on the books:

• — A high-speed rail bill would authorize investing $2.25 billion in recently granted federal funds to develop such a system in California, creating an estimated 50,625 jobs.

• — Two bills would authorize the state to spend $773 million in federal Qualified School Construction bonds to build schools in 43 school districts, creating an estimated 11,400 jobs.

A commentary in the San Diego Business Journal by Dan Dufrense, director of government relations for Epsilon Systems Solutions Inc. (a business that employs people):

Here we go again.

California is strapped with more than $20 billion of deficit, a 12.3 percent unemployment rate and a staggering decline in home values. Faced with these daunting economic indicators, the outlook of the California Legislative Analyst’s Office for the 2010-2011 budget suggested that one way to repair our state’s unfortunate economic plight is to eliminate or reduce the California Enterprise Zone, or EZ, Program. Unfortunately, the Legislative Analyst’s Office’s recommendation will almost certainly hurt, not help, California’s struggling economy.

Through hiring tax credit incentives and manufacturing accelerated depreciation schedules, the California EZ Program encourages businesses to locate in historically economically challenged areas and hire employees who often face high barriers to employment.

Several areas of the country have experienced “corporate flight,” whereby companies relocate from an inner city neighborhood to a suburban community. Detroit and Buffalo, N.Y., are prime examples of how “corporate flight” ultimately results in increased unemployment, chronic homelessness, and elevated crime rates. The California EZ Program was designed to help prevent this type of devastating business exodus and the numbers demonstrate that the program continues to be a great success.

Stimulus For Change

By providing corporate tax incentives and expanding employment opportunities, the California EZ Program continues to transform economically challenged areas into thriving business hubs. National City and Otay Mesa, both of which are located within a California Enterprise Zone, are two local examples of this positive trend. Companies from throughout the San Diego region are now looking to National City and Otay Mesa as viable locations for the expansion of a lasting corporate footprint.

For example, Epsilon Systems Solutions Inc., a government contractor based in San Diego, has two locations in the San Diego Regional Enterprise Zone — one in National City and the other in Otay Mesa. Epsilon Systems’ work is focused on offering technical support for government agencies such as the Department of Defense and Department of Energy. Whether it is pipe fitting, welding or manufacturing, Epsilon Systems’ National City and Otay Mesa facilities draw from the local populous to fill its expanding hiring needs. Epsilon Systems reinvests the tax savings it realizes from participating in the California EZ Program to provide new hires with an abundance of training opportunities.

Tools To Be Competitive

The California EZ Program has also contributed to Epsilon Systems’ ability to offer its employees access to an employer-subsidized medical, dental, life and disability plan, a Stock Ownership Plan, Profit Sharing Plan, and matched 401(k) retirement plan. While other companies are closing their doors, Epsilon Systems has remained competitive.

As lawmakers tackle one of the toughest budget years, they should not be shortsighted and cut back a proven job creation tool. California needs the Enterprise Zone Program now more than ever — by creating good-paying jobs we will take pressure off of government assistance programs and generate more individual and corporate tax revenue to fill the state’s coffers. Enterprise zones help businesses survive and flourish and that is one of the best ways to ensure economic recovery.

CAEZ is launching a letter writing campaign in support of the Enterprise Zone program. From the CAEZ.org website:

DATED: Wednesday, February 3, 2010

URGENT! State Legislators are discussing possible cuts to or total elimination of the Enterprise Zone Program. Time is critical, decisions will be made within the next few weeks.

CALL TO ACTION – Write Letters to Assembly Member Manuel Perez. As you know, Asm. Manuel Perez held special Enterprise Zone hearings last year and also was a keynote speaker at the CAEZ Training Conference in November. His office is assisting us with coordinating the Save the Enterprise Zone Program campaign. Please forward this information to your local elected officials, your lobbyist and your EZ Businesses. It is especially important that Sacramento hears from businesses of every size. Please ask them to write letters. Because a quick response is needed, we have drafted a sample letter to make it as easy as possible. Click here for the sample letter.

Please send copies of your letters to action@caez.org
Any questions, please call: (530) 830-CAEZ (2239) or email: action@caez.org

As reported in Capitol Alert:

The Republican governor had his staff install outside his office a repeating video loop of President Barack Obama telling ABC News on Monday, “I can guarantee that the worst thing we could do would be to raise taxes when the economy is still this weak.” The display is in a case titled “State of California,” next to the displays for California counties in the State Capitol.

Here is the transcript from Diane Sawyer’s interview on ABC:

SAWYER: To all the people terrified about the deficit, $1.5 trillion more this year than taken in expected next year. Can you guarantee them still that there will be no taxes on anybody who makes under $250,000 a year? That’s still the absolute rule?

OBAMA: I can guarantee that the worst thing we could do would be to raise taxes when the economy is still this weak.

San Diego ABC affiliate 10 News reported on the potential fate of the Enterprise Zone program in the current budget mess.

Here is the video of the televised report:

Here is the accompanying story:

SAN DIEGO — A program that has put almost 2,000 San Diegans to work could be eliminated by the state in order to save money, 10News reported.

Alex Bratter is happy he found a job when he left the U.S. Navy, especially when so many veterans are unemployed.

“You know, they spend a year or so looking for a job and there’s just no real advantage except for the weather to be here,” said Bratter, who now programs electronics for Navy submarines for Epsilon Systems in Otay Mesa.

Epsilon received up to $37,000 in tax credits for hiring Bratter as part of the state’s Enterprise Zone program. The program credits companies for hiring veterans, recently unemployed workers or people living in low-income areas. More than 1,800 San Diegans have been hired through the program. The program also rewards businesses for operating within the “Enterprise Zone,” which includes parts of San Diego, National City, Chula Vista and San Ysidro.

Alejandra Mier y Teran of the Otay Mesa Chamber of Commerce told 10News, “I mean, from $100,000 to $20,000. Really, there’s no limit.”

“We’re able to hire more people, generate more jobs and create a direct benefit into the community here in Otay Mesa,” said Dan Dufresne of Epsilon Systems.

Unfortunately, other companies may not be able to do the same because the state could eliminate the program to balance this year’s budget.

“It’s not a good idea, certainly not a good idea for Epsilon Systems and it’s not a good idea for the state in general,” said Dufresne.

E&E Enterprises in Chollas View received more than $60,000 in tax credits that allowed them to purchase new vehicles for their mechanics.

“And it was just like a jolt of income and interest and pride in our company,” said Vicki Garcia-Golden of E&E Enterprises.

If the Enterprise Zone Program goes away, millions in tax credits could be lost for local businesses and veterans like Bratter may be forced to look elsewhere for work.

“Right there, so many people would want to move away,” said Bratter.

Gov. Arnold Schwarzenegger has not included the Enterprise Zone Program in his budget cuts.

However, a bill has been introduced in the state Assembly that could diminish or eliminate the program.

There is an educational item in Capitol Weekly by John Howard examining the issue of how various things are “scored” for their value in the State budget. Very often items are deemed to be worth one thing for the purpose of the budget, but turn out to be worth a very different amount in reality:

The use of funny money is not new. Earlier administrations did the same thing.

One memorable example: The sale of Agnews State Hospital in the Silicon Valley, scored in successive budgets as a revenue producer, finally was sold. “It was a classic. They must have scored Agnews seven times before it sold, and each time it went up and got more valuable,” said one fiscal expert familiar with the issue. The 81-plus acres finally sold for $51 million in the mid-1990s.

The administration several months ago sought to sell off a piece of the State Compensation Insurance Fund to capture $1 billion, a move that fiscal analysts in and out of government said was poorly thought out and unworkable even before the ink was dry on the proposal. Workable or not, the sale can’t go proceed now because of litigation.

“We were ready to go forward and have been prepared to go forward, but there is a lawsuit challenging the ability of the state to do so,” Palmer noted.

The governor, several times, inflated the level of tribal gaming revenues on the General Fund by potentially hundreds of millions of dollars. He fruitlessly sought to privatize the Ed Fund – the repository of student-loan payments – and wildly overestimated its value at $1 billion.

He sought to privatize the lottery, unsuccessfully, despite expert advice that the move was not feasible, and earlier in his governorship he factored $450 million in revenue into his spending proposal based on the state’s projected share of punitive damage award dollars – money that never arrived. An LAO assessment at the time estimated the state’s potential take at $60 million – less than a one-seventh the figure predicted by Schwarzenegger. But even that estimate was wildly optimistic.

He sought to sell and then lease back state office buildings, and scored the savings at $300 million; the plan died, but is in the works again this year, probably closer to $200 million In his latest budget, he wants to save perhaps $200 million by releasing imprisoned, undocumented immigrants because the federal government isn’t paying fore their incarceration.

He had counted on $100 million a year from a hotly contested offshore oil-drilling project that has been turned down by the State Lands Commission, thrice opposed by his own choice for lieutenant governor, Sen. Abel Maldonado, R-Santa Maria, and disliked in the Legislature. The administration would like to see the project reconsidered and approved by the State Lands Commission, or given the go-ahead in a bill approved by the Legislature. Last year, legislation to do that made it through one house.

One plan, to receive upfront a share of tobacco settlement money due to California did work out. It remains an example of successful, creative financing, worth more than $1 billion.
“Some of these revenue proposals have worked out but lots of them haven’t, based on either being too optimistic or too complicated for the state to ultimately pull them off,” said Michael Cohen, deputy legislative analyst.

When evaluate recommendations to eliminate the Enterprise Zone program and use those funds for something else, it is important to keep in mind that there is no bank account with funds sitting in it for the EZ program. Since the “cost” of the program is a function of how much less in taxes profitable companies will be paying, it should be very difficult to get an accurate “score” for the budget, especially in a down economy. If the loss of an Enterprise Zone results in the loss of businesses and jobs, it’s likely to cost the budget much more revenue than it gains.

Reported by Bloomberg:

California Governor Arnold Schwarzenegger, anticipating a $21 billion budget deficit, plans to ask President Barack Obama to ease mandates and minimums on social programs to save as much as $8 billion.

The Republican governor plans to seek the relief, according to a California official who asked not to be identified because details haven’t been resolved. Instead of seeking one-time stimulus money or a bailout, the most-populous state wants the U.S. to reduce mandates and waive rules stipulating expenditures on programs such as indigent health care, the official said.
…
Democrats, who control both chambers of the Legislature, are expected to oppose wholesale cuts to health and welfare programs. Such resistance, along with Republican opposition to tax increases, will be exacerbated as election-year politics heightens the partisan divide. Half of the state’s 120 Assembly and Senate seats go before voters in November.

Budgets and tax increases in California must be approved by a two-thirds majority, and Democrats are two votes short in the Senate and six in the Assembly.

“When you are looking at a deficit in the size we have, everything needs to be on the table,” Assembly Speaker Elect John Perez, a Democrat from Los Angeles, told reporters on Dec. 11. “The reality is that the likelihood of passing taxes in this environment is slim, but everything has to be on the table. We have to come up with a resolution to this budget crisis that asks everyone to sacrifice, not just the people that are in the greatest need.”

Here is the KQED podcast with John Myers and Anthony York discussing the next budget crisis and the LAO report. It won’t put a smile on your face.

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The LAO has published a report projecting a new budget shortfall of $20.7 billion for the 2010-2011 budget. They say that:

Our forecast of California’s General Fund revenues and expenditures shows that the state must address a General Fund budget problem of $20.7 billion between now and the time the Legislature enacts a 2010–11 state budget plan. The budget problem consists of a $6.3 billion projected deficit for 2009–10 and a $14.4 billion gap between projected revenues and spending in 2010–11. Addressing this large shortfall will require painful choices—on top of the difficult choices the Legislature made earlier this year.

Here is a video of Mac Taylor explaining the results:

Here is the Reuters story:

OAKLAND, Calif., Nov 17 (Reuters) – California faces a budget gap of nearly $21 billion over its current and next fiscal years, according to the state government’s budget watchdog agency, the Los Angeles Times reported on Tuesday.

The newspaper said California’s Legislative Analyst’s Office would issue an official report on Wednesday with its shortfall estimate.

The projection comes less than four months after Governor Arnold Schwarzenegger and lawmakers agreed to a budget plan that closed a deficit of more than $24 billion largely with deep spending cuts to respond to plunging revenues amid the worst economic crisis to hit the most populous U.S. state since the Great Depression.

Schwarzenegger said last week he expects a budget gap for the rest of the current fiscal year of between $5 billion to $7 billion. His finance advisors had previously said the state government would see a $7.4 billion gap in the next fiscal year beginning in July.

But next year’s budget shortfall will be much larger than initially forecast, the Los Angeles Times said. Citing sources briefed the upcoming report, it said the deficit will be $14.4 billion.

From the Sacramento Bee’s Capitol Alert:

Gov. Arnold Schwarzenegger has just announced that he will call a special session in late September so legislators can consider the Commission on the 21st Century Economy’s recommendations for overhauling the state’s tax system.

An exact date for the special session has not been set, but the press release notes that the commission’s deadline for submitting its findings has been extended yet again to Sept. 20. That means legislators could be back in the Capitol just over a week after the regular session ends Sept. 11.

See The Sacramento Bee.

We at least have the beginning of a deal:

Sacramento Bee: “A deal — at last”

Christian Science Monitor: “California budget cuts deep into healthcare, schools”

NPR: “California Lawmakers Set Out To Sell Budget Deal”

Los Angeles Times: “Governor, legislative leaders begin building support for their budget pact”

The Economist: “Plugging the gap“

Remember the Commission on the 21st Century Economy?  On its website, the COTCE explains that, “Governor Schwarzenegger’s Executive Order S-03-09 mandated the bipartisan Commission on the 21st Century Economy to re-examine and modernize California’s out-of-date revenue laws that contribute to feast-or-famine state budget cycles.”  But apparently the commissioners misunderstood “bipartisan” to mean “two different parties.”

Dan Walters explains how things are going in the Sacramento Bee:

As they struggle – so far in vain – to balance the state budget, Gov. Arnold Schwarzenegger and legislative leaders have hoped that a bipartisan, blue-ribbon commission on taxation would show them how to mitigate future budget crises.

However, the commission, chaired by Southern California businessman Gerald Parsky, is developing a deep ideological schism that could doom agreement on a broad overhaul of the state taxation system.

The Governor’s Commission on the 21st Century Economy, whose members are appointed by both Schwarzenegger and legislative leaders, has already postponed its report once, from April 15 to July 31, and a liberal faction’s decision to develop an alternative tax plan could delay action even further.

Parsky and other Schwarzenegger appointees had been on the verge of recommending a massive overhaul of the tax system that would move toward a flat tax on incomes, rather than the state’s multi-bracket income tax, replacing the sales tax with a “net receipts tax” similar to a European-style value-added tax, and perhaps eliminating the corporate income tax.

It was aimed at broadening the tax base, moving away from reliance on income taxes from high-income Californians, and thus creating less volatility and more predictability in revenues to soften the state’s boom-and-bust budget pattern.

But reducing taxes on the wealthy and increasing them on middle- and low-income Californians is a hard sell for liberals. Fred Keeley, the Santa Cruz County treasurer and a former state assemblyman, has emerged as the leader of a liberal faction that wants to preserve the personal income tax, perhaps add a “carbon tax” to discourage use of petroleum, and, if it could, modify Proposition 13, the 1978 property tax limit.

Keeley and several like-minded members met with Democratic legislative staffers and others on the liberal side of the political scale last week and agreed to develop a “blue plan,” so named for its left-of-center approach.

Keeley and Boalt Hall School of Law Dean Christopher Edley Jr. are drafting the blue plan for presentation to the commission next week in a direct challenge to Parsky, who has been pushing his vision of tax reform very hard. “I don’t think you get a consensus product by driving a stake on one side,” Keeley said.

Next week’s meeting in San Francisco was supposed to be when commissioners would nearly finalize their recommendations. Schwarzenegger has indicated that he wants a plan that could be quickly presented to the Legislature for an up-or-down vote without modification, in hopes of avoiding a protracted legislative process in which the plan could be pecked to death by lobbyists.

The emergence of a blue plan, however, makes it unlikely that the commission will finish its work this month and, without major concessions by the rival factions, makes it less likely that the commission will ever agree on a major overhaul of California’s convoluted tax system.

The Los Angeles Times picked out an interesting idea from the Governor’s recent chat with the Sacramento Bee’s editorial board (see this post for the video):

Gov. Arnold Schwarzenegger said today that he would like to see such “radical” proposals come out of a commission now studying an overhaul of the state’s tax system. The governor told the editorial board of the Sacramento Bee that he hoped the commission would not be afraid to propose something like “a 15% straight tax.”

“That’s the kind of radical, daring kind of a proposal that I want to see on the table so we can look at it and say, ‘Oh, let’s study this, maybe that is the way to go,’ ” Schwarzenegger said during the discussion, which was webcast.

The current system, based on highly unstable income tax revenue that fluctuates with the economy, “doesn’t work,” Schwarzenegger said.

Advocates of a flat tax, which applies a single tax rate to all income, say it increases compliance with the tax codes because it is so simple and easy to understand. But opponents dislike that it taxes the wealthy at the same rates as the poor.

The Governor is talking about proposals he is expecting from his “Commission on the 21st Century Economy” which next meets on June 16.