- California Taxes and Budget Ride on Governor's Proposition 30
- October 29, 2012
- Law Firm: Greenberg Traurig, LLP - Sacramento Office
Governor Jerry Brown and democrats in the California Legislature have a lot riding on Proposition 30. Its failure would almost certainly trigger a special session of the Legislature to re-think previous solutions to the budget crisis contained in the "Trigger" legislation that accompanied the 2012 budget. What we don't know is, "whose ox will get gored."
It is no secret that California has suffered six straight years of budget deficits and the better part of the last two decades struggling to get its fiscal house in order. Former Governor Gray Davis was only the second governor in the United States' history to be recalled after turning a $12 billion dollar surplus into a $30 plus billion deficit in just two years.
While making marginal progress in stabilizing the state's finances, former Governor Schwarzenegger left a double digit deficit to his successor current Governor, Jerry Brown. Brown campaigned on a "no tax increases without a vote of the people" platform, so enter Proposition 30 on the November 6 ballot in California. Democrats in the California legislature refused the more politically unpopular cuts Governor Brown had asked for in health and human service areas of the budget. Instead, they went along with a scheme to balance the majority-vote budget by assuming $6 billion in new annual tax revenues in 2012-13 and beyond based on passage of a large personal income and sales increase to be approved by the voters on the November 6 election. The budget plan was passed on a straight party line vote with all Republicans refusing to support the tax increases or cuts to education it contemplated.
Proposition 30 would temporarily increase the state sales tax rate for all taxpayers and the personal income tax (PIT) rates for upper-income taxpayers. It does this by increasing the state's sales tax (already about the highest in the country with rates over nine percent depending on local jurisdiction) by one-quarter cent for everyone for four years.
In addition, it would raise the state's top PIT rates by 1% for single filers making more than $250,000, 2% for those earning more than $300,000 and 3% for those earning more than $500,000. When combined with the existing California “millionaires 1% surcharge,” top PIT rates in the state would be 13.3%. The PIT tax increase would stay in effect for seven tax years through 2018 and then sunset with the highest rates falling back to 10.3 percent after that.
The budget, however, also includes a backup plan that requires spending reductions (known as "trigger cuts") in the event that voters reject this measure. The trigger cuts were included with the budget as a financial hedge against the proposition failing. The trigger cuts would automatically reduce state spending by $6 billion in the event the proposition fails ($5.9 billion of this are cuts to K-12 and higher education). This was necessary in order to get Wall Street financiers to underwrite a multi-billion dollar revenue anticipation note (RAN) that Sacramento needed to finance the cash flow of the 2012 budget plan. The RAN must be paid back by June 30, 2013, and failure of Proposition 30 would make that impossible without the trigger cuts.
However, many believe that if Proposition 30 were to fail (which is likely based on recent polling data), the governor would be under enormous pressure to call the lame-duck legislature back into session to recalculate the $6 billion in trigger cuts. Given that the California Teachers Association (CTA) has such tremendous clout in the capital, many political analysts believe that the CTA simply will not stand by as $6 billion in automatic cuts are made to the state's public education programs. Under this scenario, legislators would be called back to Sacramento on Monday, November 12, and have two weeks before the Thanksgiving Day holiday to pass legislation rejiggering the cuts to education. The new legislature would be sworn in on Monday December 3.
There is no telling how the capitol democrats and republicans would balance the deficit ridden 2012 budget, but many returning lame-duck legislators would be politically more capable of making the tough votes than the new crowd that would be sworn in come December. A number of the termed out legislators will not be seeking future political posts. While possible, another attempt at tax increases is unlikely. Not only would that take a super majority of a two-third's vote, but in the aftermath of a statewide tax increase ballot proposition going down to defeat, many legislators on both sides of the aisle would not be willing to make such a vote. No doubt some of the more controversial cuts that Governor Brown called for earlier in the year in the health and human services area would resurface as options that must be considered along with pared down reductions in school aide. Time will tell, but one thing is nearly certain - we have not heard the last of California's fiscal woes.