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Nonpartisan analysis: Brown’s approach on right track for state

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POSTED January 11, 2012 7:49 p.m.

SACRAMENTO  (AP) — Gov. Jerry Brown received praise from the Legislature's nonpartisan analyst Wednesday for producing a plan that could ultimately balance the state's perennially deficit-ridden budget, but the governor also received a sobering reminder that his proposal faces a number of obstacles in the months ahead.
The Democratic governor's budget essentially gives California's a choice: Approve higher taxes in the fall, or the state will immediately enact another $5.4 billion in cuts that could include reducing the school year by three weeks.
The state's nonpartisan legislative analyst, Mac Taylor, said Wednesday that if the Legislature passes a spending plan similar to what the governor proposed, California will have taken a dramatic step toward solving its ongoing deficit.
"The Legislative Analyst's Office report underscores the fundamental uncertainty of our time and, therefore, the financial imperative to be prudent, make the tough cuts now and give the voters a choice on additional revenues," Brown said in a statement Wednesday, reacting to the analysis of the budget proposal he released last week.
But the plan faces hurdles: It perpetuates the state's reliance on tax revenue from the rich, a volatile source that fluctuates greatly from year to year, requires support from Democratic lawmakers who are opposed to another year of deep spending cuts to education and social service programs, and hinges what is perhaps the most difficult to read: the whim of California voters.
Brown estimated that California faces a $9.2 billion deficit in the 2012-13 fiscal year, which begins July 1, and has called for closing that shortfall with a near equal balance of spending cuts and the temporary tax increases he wants voters to approve in November.
The analyst, however, gave a more conservative estimate of state tax revenue than the one Brown presented, citing a lower forecast of income and capital gains taxes from the wealthiest residents. The difference in overall revenue between the governor's estimate and the analyst's is $3.2 billion, mostly in income taxes.
Taylor told reporters that his analysis was like waving a "cautionary yellow flag" to lawmakers about Brown's optimistic revenue projections that he said make the governor's budget risky.
"I think what we're concerned about is the capital gains assumptions that the administration is making is a little bit optimistic," Taylor said.
Revenue from capital gains taxes has been a huge boost to California's general fund during boom times, such as when shares of Apple or Google soar. Tax gains from an initial public offering for Facebook, based in Silicon Valley, could provide another windfall to California's budget this year, but Taylor said even that would not be enough to close the budget deficit.
Senate Minority Leader Bob Huff, a Republican from Diamond Bar, said the governor's proposal will only increase the state's dependence on income taxes from the wealthy, which can be volatile from year to year. The top 1 percent of income earners pay about 40 percent of income taxes, which is the dominant source for the state's general fund, which the governor pegged at $92.6 billion in the coming fiscal year.
"It will simply result in yet another boom and bust cycle, which caused our current budget crisis," Huff said in a statement. "Senate Republicans stand ready to work with the governor to craft a bipartisan budget solution that includes necessary government reforms to education and public employee pensions, without placing additional burdens on California families."
Ana Matosantos, the governor's finance director, said she remained confident in the state's revenue projections.
"We and the analyst's office have different estimates of exactly how fast income for these earners will increase," Matosantos said.
How fast tax revenue will grow in California while the economy is still struggling to emerge from the recession is important for deciding how the final budget will look when the Legislature adopts it, perhaps as soon as its mid-June deadline.
Democratic lawmakers, who control the Assembly and Senate, have said they are not keen on making further budget cuts after several years of reducing the services available to the state's neediest residents. At the same time, school employees have been laid off and higher education funding has been cut significantly, leading to skyrocketing tuition.
The governor wants the Legislature to start making the cuts soon, partly as a way to demonstrate to voters that increases are necessary, but Democrats have said they are inclined to wait until Brown releases his revised budget in May to get a truer picture of California's tax revenue.
The $4.2 billion of cuts in Brown's budget proposal hits an array of state services, including CalWORKS, the state's main welfare program, Medi-Cal, public schools, subsidized child care and in-home services for the disabled. The governor said the cuts to social service programs mean recipients will have the same amount of money in real terms as they did during the 1980s.
"I'm not going to overreact," Senate President Pro Tem Darrell Steinberg said last week when the governor released his budget plan. "This is not the real crunch time."
Steinberg said he was willing to immediately work with the governor on one money-saving aspect of the budget proposal, consolidating state agencies.
The legislative analyst's report released Wednesday praised Brown's general approach to budgeting: a combination of tax increases and spending cuts combined with additional cuts to be enacted automatically if voters reject higher taxes in November.
The governor wants a November ballot initiative that would temporarily increase taxes on the rich, starting with individuals making more than $250,000, and raise the statewide sales tax by half a cent, to 7.75 percent. The taxes would expire in 2017.
The administration estimated the temporary tax increases would raise about $7 billion a year, but the legislative analyst's office has pegged that figure at around $4.8 billion in additional revenues.
Whether voters will approve those tax increases is an open question.
Brown is telling Californians they must choose between paying higher taxes or accepting cuts that would result in three fewer weeks of school, higher college tuition and fewer state park rangers, among other changes.

 

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