Global Courant 2023-05-29 17:00:24
SACRAMENTO —
Gov. Gavin Newsom has sent the legislature a state budget proposal that is unrealistic and spews red ink.
That is essentially the outright opinion of the most trusted figure-crunching outfit in Sacramento: the impartial legislative analyst firm.
By law, the annual budget must be balanced. But “balanced” is a subjective characterization based on guesswork. Often it is rooted in wishful thinking and clumsy calculations.
Newsom’s revised $307 billion budget proposal recently submitted — popularly known as the May revision — is either too thick on spending or too thin on taxes, legislative analyst Gabriel Petek claimed.
Newsom and the legislature must resolve one — or both — before the June 15 deadline for approving a budget. That means cutting programs or raising taxes — or a little of both.
“There is less than a one in six chance that the state will be able to pay the spending level of the May revision over the five-year period,” the LAO warned. “This means that if the legislature passes the governor’s May revision proposals, the state is very likely to face more budget problems in the years to come.”
That would mean even deeper program cuts or stronger tax increases in a state where tax rates are already among the highest — if not the highest – in the nation. That’s not exactly a good sales pitch for outside investment.
However, Newsom denies that this is a high-tax state for 99% of Californians, insisting, “I’m not a tax-and-spend liberal.”
In fact, he has so far flatly rejected an attempt by Senate Democratic leaders to raise corporate taxes on net incomes of more than $1.5 million.
“I don’t think now is the right time to raise taxes,” he said.
And for that, he received unusual praise last week from an unlikely source: Jon Coupal, president of the Howard Jarvis Taxpayers Assn.
“Give some credit where credit is due,” Coupal wrote in a column. “Despite heavy pressure from far-left progressives in the legislature and public sector labor organizations, the governor is proposing no significant tax increases.”
That probably satisfies most voters. But since he has rejected the leftists’ push to tax and spend, he had better practice with justice programs.
Newsom finds himself in an unusual role. Budget problems are a new predicament for him. So far, he has been lucky enough to escape the politically risky dilemma that has faced virtually every California governor for the past 64 years: the need to eliminate budget deficits, usually with higher taxes plus spending cuts.
Exactly one year ago, Newsom and the legislature were running a $100 billion budget surplus.
Now Newsom forecasts a deficit for the fiscal year beginning July 1 of nearly $32 billion. The LAO pegs it a bit higher at almost $35 billion. Over the next four years, the analyst expects cumulative shortfalls of $52 billion.
How did the budget go from black to red?
Inflation, rising interest rates, bank closings – all of this suppressed the economy, especially the stock market, and resulted in lower tax revenues for the state.
One culprit is California’s ultra-progressive state income tax that Newsom praises. “Soak the rich” may be a popular concept, but it results in a highly volatile tax system that relies too heavily on the rich. The top 1% of California earners pay nearly 50% of income taxes. And when the economy falters and falls, wealthy people’s capital gains do too, and they pay less in taxes.
A unique problem this year is abnormal uncertainty.
One of the uncertainties was whether President Biden and Congress could raise the debt limit in time to avoid federal bankruptcy and economic chaos. That was likely resolved by a weekend deal between Biden and House Speaker Kevin McCarthy (R-Bakersfield).
Another uncertainty comes from the federal and state governments extending the tax filing deadline for Californians from April to October due to winter storms. No one in the Capitol can know for sure how much income and corporate taxes will pour in, but the administration estimates about $42 billion.
“We’ve never had so many months of delays,” said HD Palmer, state finance spokesman. “It’s a new level of uncertainty that we haven’t faced before.”
It’s all the more reason to prepare for the worst and begin cautiously cutting programs, including some pet peeves, such as Newsom’s favorite climate and health care projects. One is Medi-Cal coverage for all eligible low-income people, regardless of their immigration status.
Newsom thought he was being fiscally sensible by relegating some expenses to “one-off.” But the LAO now says the state doesn’t even have enough money for that.
“Most of these expenses are no longer affordable,” says the analyst.
Last year, the governor and legislature agreed to temporarily spend $28 billion for one year. Newsom recently reduced that to $11 billion. The LAO recommends lowering it further to $4 billion.
It also lists other options without specifically recommending any. These potential solutions include “cost shifting” – taking money out of one program and spending it on another, or putting more burdens on local governments.
They could dive into reserves for rainy days. But Newsom dismisses that idea for now, theorizing stored stock may be needed later. And the LAO agrees. But the legislature can try to seize the easy money anyway. It always wants to spend more than the governor.
This year there is not enough tax revenue for any Democratic spending plan.
“It is quite unlikely that the state can afford the May Revise proposal,” said analyst Ann Hollingshead, who prepared the LAO report. “There is too much spending or too little income.”
The governor and legislature can always ignore the LAO warnings and create a fantasy budget that will exacerbate the state’s problems later on. That would be standard for Sacramento.
