• California: New Budget Creates Seismic Shift in the Board of Equalization, Expands the EITC
  • August 2, 2017 | Authors: David M. Kall; David D. Ebersole; Michelle Rood
  • Law Firms: McDonald Hopkins LLC - Cleveland Office; McDonald Hopkins LLC - Cleveland Office
  • Earlier this month, the state’s $183 billion budget bill for the 2017-18 fiscal year, AB 97, passed both chambers. This week, Gov. Jerry Brown signed it into law.

    CALMatters quoted Gov. Brown’s characterization of the budget as “balanced and progressive.” “Progressive” refers to the fact that it expands benefits for many poor Californians, which make up 25 percent to 33 percent of the Golden State’s 39 million residents. “Balanced” means that the budget spends “every last dollar” the state is projected to receive.

    The earned income tax credit is an example of a progressive benefit, designed to help poor Californians. The California Chamber of Commerce reports that the budget’s EITC expansion will

    Support more working families, including self-employed parents, in line with the federal EITC. It also expands income ranges to help families working up to full-time at the newly increased minimum wage benefit from the program. The expansion makes more than 1 million additional households eligible to claim the credit. For the 2015 tax year, nearly 400,000 households claimed the credit.

    But Republicans were not very happy with the budget bill. On her website, the Senate Minority Leader, Pat Bates, said that it “continues a trail of broken promises and bait-and-switch maneuvers exploiting the initiative process.” She pointed to the tobacco tax initiative that voters approved last year on the promise that the new tax dollars would help address the shortage of doctors and dentists serving disadvantaged Californians. Instead, she asserted, the budget “fails to dedicate all of those tobacco tax dollars for health care.” She also disparaged the budget because it “ignores a school bond initiative voters approved which would have gone to building and modernizing classrooms for our students and teachers.”

    The League of California Cities posted a list of the key items contained in AB 97, noting that it “largely tracked” the May revision that we detailed when it came out and the end of that month.

    Among the most important items are the following:

    • Implementation of the Taxpayer Transparency and Fairness Act of 2017 by way of AB 102, which creates a “seismic shift” in the way taxes are administered under the State Board of Equalization (BOE). We have addressed the BOE’s problems several times this year, most recently in May, when lawmakers seemed finally ready to fix the beleaguered Board. Now, the new budget accounts for an agreement between the Governor and legislative leaders, with the support of the State Controller and Treasurer, that will lead to the transfer of responsibility for the collection and allocation of local sales and use taxes, among other things, to a newly created Department of Tax and Fee Administration.
    • Allocation of transportation funds under the recently passed SB 1. In our blog about the May revision, we explained that SB 1 increases the gas tax and creates a new annual Transportation Improvement Fee. The new revenues are to be put toward the following:
      • $1.5 billion in local assistance and capital
      • Up to $20 million State Highway Account funds, matched with up to $20 million federal funds, for its zero-emission vehicle project
      • $3.8 million in 2017-18 and $7.8 million in 2018-19 from the Road Maintenance and Rehabilitation Account for additional costs
    • Allocation of the $2 per pack increase in tobacco taxes to various health care purposes.
    • Implementation of various housing solutions for low income people, including:
      • $20 million for navigation centers, which are flexible dormitory style facilities where case managers connect individuals experiencing homelessness to permanent.
      • Additional resources for addressing homelessness, includingn$20 million for the Emergency Solutions Grant Program, $40 million for navigation centers, and $7.5 million for other community centers and shelters.

    Other expenditures include funding for economic development through small business assistance, state retirement contributions, after school programs, drought response activities, including safe drinking water efforts, various parks and recreation activities, local public safety initiatives, and corrections and rehabilitation.

    Items that still need to be buttoned up include an extension of the Cap-and-Trade program, water conservation legislation, and affordable housing.

    In his state-of-the-state speech, and again when the May revision came out, Gov. Brown forecasted a downturn in the state’s economy and possibly even a recession in the coming years. Along these lines, the CALMatters piece observed that there are a number of clouds over the budget, including the following:

    • $282 billion in long‑term costs, debts, and liabilities, $279 billion of which are related to retirement costs of state and University of California employees.
    • $6 billion for payments to the California Public Employees Retirement System is insufficient in light of sharp increases projected in the future.
    • $9.9 billion in reserves, as hedge against an economic downturn, also insufficient in light of estimates that even a moderate recession would slash state revenues by $55 billion over three years.
    One thing the budget does not address is tax reform, which CALMatters opines is sorely needed. It argues that California has become increasingly reliant on revenues from a “relative handful” of high-income taxpayers, which makes that revenue stream unpredictable.