EZ Policy Blog

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.

Apparently, the Enterprise Zone was not enough for this business:

When a company decides to leave town, community leaders sometimes try to downplay the impact. But Affymetrix Inc. has been too important to the area’s biotech industry for that.

The company confirmed Friday that it’s closing its 9-year-old factory in West Sacramento next spring and will transfer most of its functions to its plant in Singapore.

About 100 jobs will be affected, although some employees will likely find work elsewhere at Affymetrix, said spokesman Andrew Noble from the company’s headquarters in Santa Clara.

Area officials were candid about the significance of the loss. They called Affymetrix a major employer and pioneer in the region’s biotech business.

“Affymetrix was … one of the early companies in the life sciences area,” said J.D. Stack, chief executive of the Sacramento Area Regional Technology Alliance. “Kind of an iconic company in the Sacramento area. It really hurts to lose them.”

Dan Walters at the Sacramento Bee alerts us to California’s new rank in business friendliness:

California has dropped from 34th to 40th place in Forbes magazine’s annual rankings of states’ business climates - just in time to help Republican legislators make their pitch for adopting business-friendly policies as part of any deal on the overdue state budget.

Here is the Forbes article, and here is the full rankings chart. It’s particularly interesting to note that California ranked dead last in the business cost category but ranked 12th in economic climate. Perhaps there is so much inherent opportunity in California that it continues to thrive despite the legislature’s attempts to stop it.

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.

Here is the August 2008 edition of the FTB’s “Tax News” newsletter.

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.

An Enterprise Zone story has just hit the national media via a link on the Drudge Report, “California may sue to block water-bottling plant over global warming impact…“  Nestle has been struggling for years to build a new water bottling plant in the Siskiyou Enterprise Zone, but environmentalists have presented steady opposition against the project.  The latest development is the Attorney General’s threat to sue Nestle:

Attorney General Jerry Brown on Tuesday said he will sue to block a proposed water-bottling operation in Northern California unless its effects on global warming are evaluated.

Nestle Waters North America wants to pump about 200 million gallons of water a year from three natural springs that supply McCloud, about 280 miles north of San Francisco. Brown’s office said that’s enough to fill 3.1 billion 8-ounce plastic water bottles.

The water would be bottled at a 350,000-square-foot facility on the outskirts of the former lumber town.

The Swiss-based company scaled back its plans in May after years of opposition from environmentalists and a group of McCloud residents. It originally sought to pump more than double the amount of water.

An official from Siskiyou County expressed dismay over the difficulties Nestle has had and pointed out that the McCloud area is in desperate need of those potential jobs.

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.

Will limiting the kinds of businesses that can locate in an area encourage economic development?

LOS ANGELES (AP) - City officials are putting South Los Angeles on a diet.

The City Council voted unanimously Tuesday to place a moratorium on new fast food restaurants in an impoverished swath of the city with a proliferation of such eateries and above average rates of obesity.

Hopefully, this is good news.  The Sacramento Bee is reporting that Tuesday’s scheduled budget vote in the Senate has been canceled:

Senate leader Don Perata scratched plans for a Tuesday floor vote on the state budget today, saying negotiations were moving forward and the vote “would disrupt that progress.”

And finally, CAEZ received an update from Frank Luera of HCD.

• The Department is in the process of auditing the zones.  Frank was very careful to emphasize that the goal of these audits is to strengthen the zones and provide constructive guidence; they are not out there looking for ways to dedesignate zones.
• He told us to expect two policy memos very shortly: 1. regarding how LAMBRAs should calculate their designation periods, and 2. how to treat the TEA in cases where a new TEA is replacing an old TEA.
• There are four zones expiring in 2009 (Los Angeles Harbor, Madera, Sacramento Army Depot, and Sacramento Florin Perkins).  HCD intends to begin the application process for those four slots in early August with applications due in late January.  The application process is expected to be even more streamlined than the last round.  For those four slots, HCD has already received 16 informal indications of interest.

CAEZ also had the benefit of again hearing from Toni Symonds, Chief Consultant, Assembly committee on Jobs, Economic Development and the Economy.  Toni raised the concern that one of the proposals in the Democratic Conference Committee is a three year suspension of Net Operating Loss carryforwards.  Since the last time the NOL was suspended in 2002-2003 Enterprise Zones were not exempted, there is a concern that this year’s proposal would do the same.

The small business community is understandably concerned about this and have floated a proposal to exempt companies with under $5 million in revenue.  Here is the press release from Small Business California.

There seems to be some openness to consider such a compromise.  An alternative compromise that CAEZ may propose would be an exemption for Enterprise Zone businesses thus preserving the strength of the incentive.  It is important to keep in mind that three years is a full 20% of an Enterprise Zone’s designation.

At the CAEZ board meeting yesterday in Sacramento, we had the benefit of hearing a budget update from Tom Sheehy, the Deputy Director for Legislation at the Department of Finance.  He provided us with a rather sobering, but extremely clear picture of the fundamental problems behind California’s chronic budget deficits.

In a nutshell, since the top 1% of income earners in the state pay 50% of all personal taxes collected by the state, when they have a good year the state collects a lot of extra money, and when they have a bad year the state collects a lot less money.  But since in good years the legislature spends all of the revenue it collects, then when there is a bad year the state doesn’t get the revenue it needs to pay for all of that added spending.  According to Sheehy, it is this volatility which is the real root of the problem.

He provided us with the following colorful illustration:  For every Tiger Woods that leaves California, we have to create 4000 new jobs paying $70,000 each to replace that revenue.

Sheehy noted that while it may be politically popular and easy to simply increase taxes on the “wealthy,” that option actually exaserbates the underlying structural problem for future years.

Sheehy also commented on the possibility that the Governor will cut government workers pay in order to save cash while waiting for the budget to pass.  He challanged the notion, as argued by Dan Walters, that the cut is a tactic or gimmick, explaining that the California Constitution does not actually allow any state employees to be paid anything in the absence of a budget.  A California Supreme Court decision affirmed this fact, but then allowed the state to pay workers the federal minimum wage under such circumstances.  The state is likely to face a cash crisis if the budget is delayed too long.

Regarding Enterprise Zones Sheehy said, “I don’t think you have anything to worry about regarding the integrity of Enterprise Zones.”

Here is the Sacramento Bee’s “Capitol Report” summary of the budget melodrama for this week:

With a budget vote set for next Tuesday in the Senate, let’s recap this week in budget news.

It started off Monday, with Gov. Arnold Schwarzenegger sounding a hopeful note: “I think this is the week when we should do a budget.”

But it was not to be.

The four legislative leaders and Schwarzenegger did meet in an afternoon Big 5 session on Monday, though no deal was struck.

Then on Tuesday, Schwarzenegger hardened his line on budget reform. “I will not sign a budget that doesn’t have budget reform in it,” he declared.

On Wednesday, a coalition of transportation advocates announced a statewide radio buy of ads blasting plans to raid earmarked transportation funds.

Then, The Bee reported that Schwarzenegger planned to sign an executive order to temporarily reduce pay for 200,000 state workers to the federal minimum wage of $6.55 per hour.

The move would preserve cash until lawmakers reach a budget deal.

The reactions quickly poured in.

State workers organized a rally at the Capitol (speaking of which, you can keep up with state workers’ news at The Bee’s new blog, The State Worker).

And Senate President Pro Tem Perata called the move “an act of war.”

In the middle of it all, Perata scheduled a budget vote for next Tuesday.

A new Field Poll shows that it isn’t just state employees that are unhappy.

A record 63 percent of Californians report being financially worse off today than they were a year ago. That number had never topped 50 percent in nearly 50 years of polling.

Since December, there has been a 34-point jump in the percentage of Californians who see the economy facing bad times (to 86 percent).

From the Sacramento Bee:

With the state budget overdue and California’s cash flow drying up, Gov. Arnold Schwarzenegger said Tuesday that he expects Democrats and Republicans to reach a compromise quickly and bring him a spending plan by next week.

The governor also raised the bar for negotiations. Schwarzenegger said he will not agree to any budget deal that fails to include long-term reforms to help the state ride out rocky economic times.

“I will not sign a budget that doesn’t have budget reform in it, because otherwise I could not keep the promise to the people of California. I told them in 2003 that we are going to become more fiscally responsible and that we are going to go and to start living within our means,” Schwarzenegger told The Associated Press in a telephone interview.

Senator George Runner, writing at Flashreport.org, makes a strong argument about the effect of tax increases:

While I don’t agree with Democrat Assemblyman Lloyd Levine’s proposal to create a 25 cent fee on plastic grocery bags, I do agree with a statement he made recently saying that charging such a fee will change consumer behavior.

Nobody wants to pay another buck or two for a plastic bag fee on top of an expensive grocery bill. Naturally, consumers will sidestep the fee by bringing reusable bags on grocery shopping trips.

Applying the same principle, consumers will find a way to avoid any tax or fee thrown their way – something Republicans have been saying for years. Consumers will either buy less or avoid the taxed item altogether, which harms businesses and eventually the economy.

From the Sacramento Bee’s “Capitol Report“:

It might be wishful thinking, but Gov. Arnold Schwarzenegger said Monday in Stockton, “I think this is the week when we should do a budget.”
…
At the event in Stockton this morning, Schwarzenegger was asked whether he was serious last week when he told The Bee that he eventually wants to force legislators to stay in a room until they agree to a budget. The governor said he went even further months earlier when he said legislators should be locked in a room and not be allowed to even use the bathroom.

Sometimes the existence of an Enterprise Zone can help a California business avoid a decision to move out of state.  But can an Enterprise Zone prevent a whole city from annexing itself to Nevada?

In Needles, that may just be the case.