California State Budget Update

SACRAMENTO – The Budget Conference Committee last night finished reconciling differences between versions of the 2008-09 state fiscal plan drafted by the Assembly and Senate. “In every poll we've seen and every conversation I've had Californians are telling us don't decimate education, don't shred the safety net, don't close parks and provide healthcare for kids – don’t close clinics,”Assembly Speaker Karen Bass (D-Los Angeles) said. “The straight truth is that takes revenue. And the straight truth is we can help solve this budget deficit by closing tax loopholes and rolling back overly generous tax breaks that were given to big corporations and the wealthiest Californians – rolling them back to levels they were under other Republican governors.” “It's time to fix the state's fiscal problem, and we're not going to do that on the backs of the middle class," Senate President Pro Tem Don Perata (D-Oakland) said. "We are not going to make deep cuts that increase class sizes, lay off thousands of teachers and severely restrict access to California's state colleges and universities. We will not turn California into a second-class state.” The joint plan rejects the Governor’s deep cuts in education and health care, and includes $9.7 billion in new revenue, which is $1.8 billion lower than the Senate recommended and $1.7 billion more than the Governor proposed. During the last three budget cycles, the state has cut $12.3 billion.Now, the Governor’s plan called for cuts in education that would force thousands of teacher layoffs, reduced spending in Medi-Cal and health care that would jeopardize medical service for all Californians and slashing in-home assistance for the elderly and disabled. The Governor’s plan would eliminate thousands of jobs at the worst possible time, when the economy is struggling. The Conference Committee budget is a balanced approach. It closes tax loopholes, rolls back tax breaks for corporations and the wealthy and cracks down on tax cheats. The Conference Committee budget restores money to education, health care and public safety thereby providing California the services it needs to bolster the economy and remain strong, livable and competitive in the 21st century. On the expenditure side, the committee’s plan: •Provides $2.3 billion more for K-12 education than the Governorrecommended. •Restores $1.5 billion in health and human services the Governorcut. This includes restoring nearly $200 million in health care services to some of the state’s most vulnerable residents, the reimbursement rate for Medi-Cal providers and federal pass-through funds for the aged, blind and disabled. •Restores $57 million in financial assistance for college students. •Reduces corrections spending by $300 million with a reform packagethat helps reduce the prison population. On the revenue side, the committee’s plan: •It reinstates the tax brackets on the wealthiest Californians byreinstating the 10% and 11% tax brackets. Revenue generated: $5.6 billion. California’s personal income tax rates ranges from 1 to 9.3 percent (for taxable income above about $93,000 for joint returns). An additional 1 percent rate applies to incomes about $1 million (that money supporters mental health programs under Prop 63). Under this budget, this proposal imposes a new rate of 10 percent for taxpayers filing joint returns with taxable income above $321,000 and 11 percent for those with incomes above $642,000. This is similar to what Republican Gov. Pete Wilson did in the 1990s. •It closes a corporate tax loophole for large corporations. Revenuegenerated: $1.1 billion. California allows companies to carry forward a portion of losses (called Net Operating Losses, or NOL) incurred in one year and use them as a deduction against earnings in subsequent years.These tax breaks are used primarily by large corporations, many of them in the manufacturing and finance area. Companies with more than $5 million in gross receipts account for just 13% of total businesses but 80% of the NOL deduction. During an earlier fiscal crisis, this loophole was suspended. When the law was reinstated, the percentage of losses eligible to be carried forward was increased from 50 percent to 100 percent. The carry-forward period was also expanded to 10 years. The FTB estimates the value of NOL carried forward exceeded $260 billion as of 2006. The budget suspends the NOL for three years. •It suspends a tax adjustment for upper-income Californians.Revenue generated: $815 million. In a year where the poor, elderly, and disabled aren’t getting cost-of-living increases for SSI/SSP and CalWORKS, the state shouldn’t be adjusting all of the tax tables for everyone else. Suspension of “indexing” would result in a proportional increase for taxpayers with incomes of up to $97,000 (joint returns), and a flat increase thereafter. As an example, a taxpayer with taxable income of $50,000 would pay about $34 more while a taxpayer with income exceeding $97,000 would pay about $180 more. •It rolls back a tax loophole for upper-income Californians.Revenue generated: $215 million. Since 1997, taxpayers have received a nonrefundable income tax exemption credit for each dependent – regardless of their income. In 2007 this credit was $294. The LAO recommended making the dependent tax credit the same dollar amount as the personal exemption credit for all taxpayers. That credit was $94 for single taxpayers and$188 for couples. The Conference Committee proposal is a variation of the LAO recommendation. It would roll back the dependent credit for taxpayers with adjusted gross income (AGI) that exceeds $150,000. As a result, it would protect the credit for lower and middle-income households. •It restores the franchise tax. Revenue generated: $470 million.Virtually all companies are required to pay some amount of corporation tax. The top rate is now 8.84 percent. Prior to 1997, it was 9.3 percent.The Conference Committee proposal rolls back the 1997 tax cut, and restores the 9.3 percent rate. •It steps up tax enforcement. Revenue generated: $1.5 billion.Modeled after successful tax amnesty efforts in the past, this proposal will collect taxes already owed to the State. Part of this revenue has been owed for years. Part will be an acceleration of revenues that would be paid in the future. This is one-time revenue. Without revenue increases, the state would have to cut an additional $9.7 billion – about the amount it takes to run the state’s 33 prisons and more than the cost of the entire UC system.