EZ Policy Blog

On Friday, the California Taxpayers’ Association endorsed Governor Schwarzenegger’s budget plan including the temporary sales tax increase. From the Sacramento Bee:

Breaking its long practice of opposing tax increases, the California Taxpayers’ Association on Friday agreed to support Gov. Arnold Schwarzenegger’s state budget proposal, including a sales tax boost.

The 82-year-old association is a nonprofit representing all taxpayers, but some of California’s largest corporations dominate its sizable board of directors, which voted 28-19 on Friday to back the proposal.

Schwarzenegger’s latest spending plan would close the state’s $15.2 billion budget gap, in part, by imposing a three-year, one-cent-on-the-dollar sales tax increase on most taxable products, except gasoline and diesel fuel.

The boost would raise $4 billion this year and $9.9 billion more over the next two years, but then would be replaced by a 1.25-cent cut on Sept. 1, 2011.

That cut, along with long-term budget changes the governor is proposing, played into the group’s decision.

“As an association representing taxpayers, we have not arrived at our position lightly,” CTA President Teresa Casazza said in a statement. “Given the current circumstances, however, we can support a temporary sales tax increase as long as it is accompanied by meaningful budget reform, an economic stimulus plan and a future reduction in the sales tax rate that will make the change a net tax reduction over time.”

Lawmakers and Schwarzenegger are 68 days into the new fiscal year without a budget, the longest the state has ever gone.

Schwarzenegger’s fellow Republicans in the Legislature, whose votes are necessary to reach the two-thirds majority needed to pass a budget, have said they will never support a tax increase.

“It doesn’t change our position at all,” Assembly Republican leader Mike Villines of Clovis said of the Cal-Tax endorsement. “I mean, Cal-Tax, I’m not exactly sure what the organization is supposed to do, but if it looks like a tax and it sounds like a tax, it is a tax, regardless of what Cal-Tax or anybody else calls it.”

Villines and Jon Coupal, president of the Howard Jarvis Taxpayers Association, said Schwarzenegger’s office lobbied Cal-Tax’s corporate board members hard over several weeks to get the endorsement.

“We think it’s unfortunate, and we don’t think it really changes a thing because the votes are not there in the Legislature, quite frankly,” Coupal said. “We’ll see. It’s disappointing that Cal-Tax folded under the pressure, but the Howard Jarvis Taxpayers Association will never do so.”

In a statement, Schwarzenegger commended the association’s board members “for having the courage to put the best interest of Californians first in supporting my compromise budget proposal.”

“It’s time for legislators to follow the lead of Cal-Tax,” the statement concludes.

Here is the video of the Governor’s press conference this morning where he discussed the budget:

Governor’s Press Conference 9-2-2008 from Max Shenker on Vimeo.

Update:

Here is the Sacramento Bee article about the event.

John Myers’ Capital Notes blog has the following report on a possible budget breakthrough:

BUDGET DAY PLUS 58 — In hopes of ending a budget stalemate that’s so far looked to be one for the record books, the state Senate tomorrow will vote on a budget plan that hinges on the chances of a few Republicans breaking with their party leadership and voting aye.

The overview budget document distributed this afternoon by Senate President pro Tem Don Perata’s office is a modfied form of Governor Schwarzeneggrer’s “August Revise” proposal.

Most notably, Senate Democrats are accepting Schwarzenegger’s temporary sales tax increase, but rejecting his call to then lower the current state sales tax. The plan also calls for slightly more state spending than the governor has proposed.

And in what could be considered a major concession, it keeps intact Schwarzenegger’s call for a larger rainy day fund for state government as well as Schwarzenegger’s demand for new gubernatorial power to unilaterally cut spending if the budget gets out of whack in the middle of the year.

The intrigue, of course, is whether at least two GOP senators will break ranks and vote for the proposal. A written statement from Senate GOP Leader Dave Cogdill makes it clear the proposal is not going to get his vote.

Of course, approval in the Senate would only mean that the budget plan then lands in the lap of the Assembly, where its tax increase proposal would need at least six GOP votes… a much tougher task.

Still, tomorrow’s vote does symbolize some movement on the budget front… even if only to force an actual floor debate on budget priorities of the two sides.

From the Fresno Bee:

Gov. Arnold Schwarzenegger told The Fresno Bee’s editorial board that he won’t settle for a bad budget and is willing to wait significantly longer for the right deal from the Legislature. He said he would hold his ground until November or even December without a budget, and would even consider “rolling right into” January with the introduction of his next budget.

Here is the Sacramento Bee’s “Capitol Alert” budget update for today:

Progress in budget negotiations remains as fleeting as ever, Assembly Speaker Karen Bass told a group of reporters in her Capitol office on Monday.

“There’s no huge deal that we’re getting ready to pop up in the next few days,” Bass said.

While this article from the San Bernardino Sun is not consistent with what I have been hearing lately regarding the status of the Enterprise Zone program in the budget process, it nevertheless provides some interesting comments from some zone insiders.  The article raises the possibility that the LAO recommendations might be incorporated into a budget, but it does not seem that either party is taking that option seriously at this point:

California’s overdue budget is wallowing in a tug-of-war between politicians who aren’t satisfied with proposed cuts to balance a hefty $15 billion deficit.

And while it’s only a blip on the radar, enterprise zones might go on the chopping block.

These 42 zones - several of them located in San Bernardino and Riverside counties - are sometimes the final factor in why companies choose to move somewhere.

These geographical boundaries offer big tax breaks for businesses opening their doors in economically depressed areas, where the majority of the work force consists of low-income families, welfare recipients or ex-criminals.

Some enterprise zone advocates say the dollar amount is incorrect because of research errors, but California could save more than $300 million if it made cuts to its enterprise zone program, according to the state Legislative Analyst’s Office.

Still, the state’s gain could equal millions of dollars siphoned away from local economies.

“California is already expensive to do business in,” said Bill Carney, president and CEO of the Riverside-based Inland Empire Economic Partnership. “For some of these companies, you’d be concerned that if you take that one incentive off the table, they’ll see an increase in costs - especially manufacturing - and it’d heighten the threat of losing those companies.”

Businesses aren’t the only ones who would lose. Cities spend a good chunk of change competing for enterprise-zone designations.

The tiny desert enclave of Barstow put about $75,000 worth of research and administration staff hours into vying for its 15-year enterprise zone, which it received in 2006, along with San Bernardino County.

“We’re under a contract with the state,” said Mark Murphy, senior management analyst for the city. “If the state were to cut it, that’d be a breech of contract.”

It’s “highly unlikely” that California would totally do away with the enterprise zone program, Murphy says.

“They might reduce some of the benefits, but who knows what that would be,” he said.

Home Depot, Save a Lot grocery store, Industrial Engine Service Inc. and a handful of other companies took Barstow’s enterprise-zone tax benefits into consideration before moving there.

“It’s hard to say whether they would’ve located elsewhere,” Murphy said. “The bottom line is: How can we set up a business to stay in business here? The whole idea is to jump-start the economy here.”

Stakeholders disagree over whether the state will really do away with enterprise zones.

The Los Angeles Economic Development Corp. isn’t taking any chances. The well-regarded research organization announced in early August that it strongly opposes cuts to the enterprise program.

But the California Association for Local Economic Development’s president and CEO, Wayne Schell, said he’d be surprised if local enterprise zones were slashed to save the state money. If any cuts were made, they’d most likely be limited, he feels.

“On the other hand, let’s just say for discussion’s sake that they eliminate the zones for (companies) who already have it. It could force them to move,” Schell said. “But it’s expensive to move.”

Moreover, some economically hard-hit companies could go out of business or be pushed to the brink if enterprise zones disappeared.

“These zones are the only useful tool for economic developers to attract, retain and expand businesses in their community,” said Yolanda Benson, a California Association of Enterprise Zones lobbyist. “These (companies) turn around and invest in making their employees better through training. Does every company do this? Some probably do, some probably don’t - but at least they have some ability to write off the expense of doing business in California.”

You can see the Governor’s press conference from this afternoon here where he officially proposes an increase in the sales tax.

Here is what the Sacramento Bee has to say about it.

Update:

I just received an email from the Governor (because I subscribed to receive their emails) with some more details of his budget proposal.  Here are some highlights of interest to this audience:

TAX PACKAGE / TEMPORARY INCREASE / PERMANENT REDUCTION

Proposes a revenue package that includes a temporary increase and permanent reduction to the state sales tax. The package includes:

• A temporary 1-cent sales tax increase for three years (excluding diesel, gasoline and jet fuel) followed by a permanent 1¼-cent reduction beginning in year 4. The additional ¼-cent reduction would be a permanent base sales tax reduction beginning when the 1-cent increase is no longer in effect.
• A two-year suspension of the Net Operating Loss (NOL) tax deduction: Suspends for two years the ability of corporations to reduce their tax liability based on prior losses and phases in conformity to federal law over three years starting in 2010 by allowing losses to offset profits in two prior years; also extends the period for carrying forward losses from 10 to 20 years.
• Modified Tax Amnesty Proposal to generate revenues while avoiding negative impacts on economic activity.
• Better align accrual of revenues and accrual of spending.

ECONOMIC STIMULUS

Proposes an economic stimulus package to stem job losses, facilitate creation of new jobs, and improve tax revenues:

• Expedites the allocation and disbursement of existing transportation, housing and water bond funds to stimulate economic growth and job creation immediately.
• Authorizes new lease revenue bonds to accelerate capital outlay projects for higher education and the Courts.
• Provides statutory authority to develop public-private partnerships with design-build authority to add new, and accelerate existing, infrastructure projects (Caballero (AB 1261) and Niello (AB 2600) bills).
• Provides flexibility in overtime laws to allow employers and employees to agree on mutually acceptable flexible work schedules:
• Allows employees to voluntarily work four 10-hour shifts without requiring overtime. All hours worked above 10 hours per day or 40 hours per workweek pay time and a half. All hours worked above 12 hours per workday and in excess of 8 hours on a fifth, sixth or seventh day in a workweek pay double time. Flexible work schedule must be voluntary for employee. Exemptions for union and government employees.
  Creates a highly compensated employee exemption for California that conforms overtime rules to federal law ($100,000 or more).
  Exempts high-paid software engineers in the competitive technology industry from overtime rules; applies only to employees whose primary duty includes non-manual work.
  Provides clarification to on-duty personnel such as armored car drivers, security guards, etc., regarding meal periods.
• Targeted tax credits to retain jobs and encourage job expansion in California.
  Runaway Hollywood production tax credit.

Flashreport.org is reporting that the Governor’s office is denying that a deal has been reached on the budget.  Senator Perata is apparently still saying that there is a deal.

The Sacramento Bee is reporting that Senate President Pro Tem Don Perata has reached a deal with the Governor on a budget. All that remains is for the Governor to convince enough Republicans to vote for it:

Senate President Pro Tem Don Perata said today that Democrats have negotiated key points of a compromise state budget with Gov. Arnold Schwarzenegger and that he considers negotiations over.

“I think we’ve, frankly, gone about as far as we can go,” the Oakland Democrat said.

Perata said the compromise plan includes a major concession by Democrats - a spending cap to limit annual state expenditures.

Republicans have been insisting on a spending cap as part of any budget pact.

“The question continues to be, are there Republican votes for it?” Perata said of the compromise plan.

The ball is in Schwarzenegger’s court, he suggested.

“A Republican governor should have some sway over Republicans,” he said.

Other key elements of the compromise plan include a temporary 1-cent increase in the state sales tax and a rainy-day fund to sock money away in boom years.

Perata did not elaborate on details of the proposed spending cap, but said it was intended to break the current standoff with Republicans.

“We’ve said to the governor, ‘What do you need in order to move forward?’ So we’ve negotiated on that point,” Perata said.

“I’ll guarantee you that there won’t be anybody in the house that’s going to be happy with the conclusion. But it is a compromise - new revenues and program cuts, and no borrowing.”

Perata said the negotiated proposal does not grant the governor authority to make midyear budget cuts if the economy nosedives.

“We’ve always said that we’re not doing anything that gives away the legislative responsibility for appropriating money in the budget,” he said.

Perata said the next step is to place the compromise spending plan before the Senate for a vote.

He said that no vote will be taken today, however, and that he did not want to call for a vote if the proposal was certain to die.

Passage of a state budget requires a two-thirds vote in each legislative house.

“When we go (for a vote), we’re going because it’s a budget that the governor can get some votes for,” Perata said.

Dan Walters in the Sacramento Bee provides some more vague budget progress speculation:

It’s still a long way from being fully cooked, but the fuzzy outline of a deal on the much-delayed, deficit-ridden state budget is becoming visible as the deadline for placing measures on the November ballot draws near.

Secretary of State Debra Bowen says Saturday is the deadline, but Capitol types believe it could be stretched a week or two. And the deadline, whenever it may be, is an important ingredient in any budget deal, because at least one of the pending elements would have to be placed before voters.

The central element is what Gov. Arnold Schwarzenegger calls “budget reform” – some new constitutional provisions aimed at preventing future fiscal problems by creating a “rainy day” reserve and giving governors more authority to cut spending when revenue falls short.

He’s willing to trade some new taxes – especially a temporary boost in sales taxes that would raise about $6 billion a year – for those reforms, even though Republican legislators balk at new taxes and Democrats don’t like spending curbs.

“We believe they need to come out of their partisan corners,” Schwarzenegger spokesman Aaron McLear said Tuesday, adding that if there’s no deal before the ballot deadline, there will be a “total meltdown.”

Here’s the latest on the budget “progress” from Sacramento Bee’s Capitol Alert:

Tempers flared during today’s Assembly floor session, as Republicans demanded the Democratic budget plan be put up for a vote, while majority Democrats accused Republicans of lacking a plan altogether.

Throughout the morning session, minority Republicans repeatedly pressed Democrats to take up the budget, to no avail.

“The public wants to see action on the budget,” insisted Assemblyman Rick Keene, R-Chico. “We want to debate it on this floor.”

Assembly Speaker Karen Bass said it was the first time in her four years in the lower house that she saw Republicans demanding a budget vote.

Maybe that means there were at least six GOPers “ready to vote for the budget,” she snidely snapped at he colleageues across the aisle.

Assembly GOP leader Mike Villines raised his microphone to challenge Democrats to “have the will” to debate their budget.

“We are at impasse,” he said.

Often, public proclamations at budget time bear little resemblance to the behind-the-scenes machinations of negotiations. But Villines said progress wasn’t to be had, publicly or privately.

Of the Big 5 talks, Villines said, “Nothing is coming of it. Nothing.”

Here is the video of the Governor’s press conference about the budget this afternoon.

Gov’s Press Conference 8-6-08 from Max Shenker on Vimeo.

This article in the Sacramento Bee highlights some reactions to Gov. Schwarzenegger’s sales tax increase proposal.  The first should raise some predictable concerns:

Higher sales tax in California? Chuck Alvey wouldn’t mind.

Alvey runs the Economic Development Authority of western Nevada, which recruits businesses to the Reno area, and he’s glad to talk about Nevada’s low-tax climate. Gov. Arnold Schwarzenegger’s proposal to tack an extra penny on California’s sales tax could offer him another selling point.

“We’ll always use something like that,” Alvey said.

Then, later on, the Bee quotes Jean Ross of the California Budget Project:

One criticism of the governor’s plan is that sales tax is regressive, meaning it is a bigger burden on the poor. The California Budget Project, which lobbies the Legislature on behalf of lower-income residents, says Californians in the bottom 20 percent of income spent 8.4 percent of their pay last year on sales tax. Those in the top 20 percent spent as little as 3 percent.

Jean Ross, the group’s director, said she prefers the Democrats’ proposal to raise income taxes on the wealthiest Californians. Yet she would support the sales tax idea if Schwarzenegger dropped his demand to tie the increase to spending cuts.

This line of reasoning is so frustrating.  As Tom Sheehy of the Finance Department explained to us at the last CAEZ meeting, it is precisely the overly progressive nature of our tax system that leads to repeated budget deficit crisis.  The FTB’s Annual Report for 2006 (see this post for a reproduction of the chart) states that the top 20 percent of income earners in the State pay 97 percent of the income taxes collected while those in the bottom 20 percent pay only 0.1 percent.  Furthermore, 3 percent of a higher income is still more tax than 8.4 percent of a lower income.

In what was perhaps a response to my last post, the Sacramento Bee quotes Senate President Pro Tem Don Perata:

In some of his most pessimistic statements to date, Senate President Pro Tem Don Perata told reporters Tuesday that talks have stalled between the legislative leaders and there is “no end in sight” for the state’s overdue budget.

Does this proposal indicate that we are getting closer to a breakthrough in the budget?

Gov. Arnold Schwarzenegger has proposed a temporary one-cent increase in the state sales tax for the next three years in exchange for long-term fixes he believes would solve the state’s perennial budget woes, several sources familiar with the negotiations said Monday.

“Controller: State computer system not up to making pay cuts“:

State Controller John Chiang said Monday an antiquated state computer system makes it impossible to adjust the state payroll quickly to issue minimum-wage checks to state workers. He said it would take at least six months to make the change.

This entry in the Sacramento Bee’s “Capitol Report” contains an array of interesting budget tidbits, especially:

There is also talk that Republicans might agree to some new revenues - though not the broad taxes Democrats would prefer.

Villines added fuel to that fire Thursday, when he said he’s open to closing tax loopholes: “I don’t believe you have to do this budget with tax increases. I do believe you may have to look at some loophole closures.”

One “loophole closure” currently bandied around is the Democrats’ plan to suspend the “net operating loss” for corporations (which represented $1.1 billion of the new funds in the Democrats’ budget proposal.)

But Republicans say they aren’t going to agree to much of anything without some type of spending cap for the state. Which, of course, Democrats oppose.

“The Legislature wishes to continue to spend like a rap star even when the hits are over and our “posse” has moved on,” is how Assemblyman Doug LaMalfa, R-Oroville, put it.

Legislative GOPers also have pushed for a free-market economic stimulus plan in the negotiations.

In his press conference on Thursday, Schwarzenegger signaled that could be in the works. “And when it comes to stimulating the economy, we hopefully have, as part of our budget, a stimulus package that will stimulate the economy,” he said.

Here is an interesting item from The Tax Foundation Blog:

IRS Publishes “Top 1%” Data by State — California’s Top 1% in the Crosshairs

by William Ahern

The IRS has shed some new light on the high-income Californians who are the targets of the state legislature’s tax-raising approach to budget balancing (IRS spreadsheet or Tax Foundation tabular summary).

By breaking out state-by-state its popular analysis of income and tax data, the IRS shows us that the top one percent of California taxpayers (150,000 people) — the same people who would pay the new, higher state tax rates of 10 percent, 11 percent and 12 percent — are already paying more in total federal income taxes than the 66 million people nationwide who make up the lower-earning half of US taxpayers.

California Republicans reject the tax-hike approach to budget balancing, and Governor Schwarzenegger has just thrown down the spending-cut gauntlet. He signed an order laying off temporary workers and withholding a portion of many other state employees’ salaries, starting at the end of the month unless the legislature sends him an already overdue budget.

As the Sacramento Bee explains:

Gov. Arnold Schwarzenegger signed an executive order today eliminating jobs for as many as 22,000 temporary state employees and reducing pay for about 200,000 state workers to the federal minimum wage of $6.55 per hour, portraying it as a stopgap measure to ensure the state can pay its bills without a state budget.

Here is a clip from the press conference where the Governor does his best to explain why this action is not political and why the legislature has such chronic problems passing a budget:

Untitled from Max Shenker on Vimeo.

The Sacramento Bee’s Daniel Weintraub speculates that we might actually be getting close to a budget deal. He also has quite a lot of interesting speculation on what that deal might look like:

But by listening to the legislative leaders talk and tapping into the chatter in the Capitol hallways, you can begin to sense what a new budget agreement might look like, whenever it comes. Here’s my best guess:

• It is going to include some borrowing. That’s not exactly going out on a limb, given the recent history of this governor and these legislators.

There is just no way they are going to close a $15 billion gap with spending cuts and tax hikes alone. So expect some gimmicks.

Lawmakers, for instance, might find a way to tap into local government funds, despite a voter-approved initiative that makes that option more difficult than before. Also, the governor’s proposal to borrow against future state lottery earnings, an idea he calls “a gift from the future,” is still very much alive. I would not be surprised if a scaled-down version of the governor’s plan emerged as part of this package.

• The final deal will include some tax increases. The worst-kept secret in the Capitol is that at least a handful of Republicans are prepared to accept some tax hikes in exchange for what they call “budget reform.” The range of possible tax increases probably tracks with the seriousness of the reforms.

If Democrats were to accept a strict limit on future spending, which has been the Republicans’ top priority, the majority party could probably get enough Republican votes to pass a sales tax increase. But the Democrats won’t go there because such a limit would constrain the growth in government services during the next economic expansion.

If Democrats instead will accept only a strengthened rainy day reserve, Republicans will probably vote for nothing more than eliminating a few tax deductions.

The shape of that budget reform has been the subject of intense talks in recent weeks among all of the legislative leaders. Ultimately, the ball is in the Democrats’ court. The stronger the limit on long-term spending they accept, the more tax revenue they are likely to get in the short term, and the fewer cuts they will have to make. Which brings us to the third piece of any deal.

• There will be some spending cuts, or at least some reductions from planned levels of spending. But it won’t be clear how much will be trimmed until we know how much they will borrow and how big the tax increases will be.