A time for budget caution — and tax reform

Less than four years after declaring California’s budget was balanced for the foreseeable future, Gov. Jerry Brown on Jan. 10 said the state is now projected to run a $1.6-billion deficit by next summer. (Jan. 10, 2017)

Gov. Jerry Brown sounded a bit like a broken record Tuesday when he released his proposed spending plan for next fiscal year, preaching prudence even as the economy seems to be booming. That’s what he said last year. And the year before that. Even the charts look the same.

But Brown has solid reason for his financial caution. The downturn he's been predicting for years seems to be, if not already here, then on its way. Although tax revenue is still up over last year, it's consistently been coming up shorter than expected in recent months — particularly personal income tax receipts, which make up 70% of the state's general fund revenues.


Then there’s the Donald Trump factor. Although state officials are planning to actively oppose many of Trump’s initiatives, the state is banking on $105 billion in federal funding next fiscal year. That includes about $17 billion to pay for the Medi-Cal expansion in the Affordable Care Act, which Trump has pledged to repeal. If and when that rug will be pulled out from under California is unknown.

"This is going to be a rough ride," Brown said Tuesday during a briefing on the highlights of his budget proposal. "We can't tell where we will be in a few months."

Democratic lawmakers [can use] their rare supermajority to push through a restructuring of the state’s tax system to make it a more dependable revenue source.

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So a little caution seems to be entirely appropriate at the moment. As such, the governor is recommending a modestly larger budget — $179.5 billion in total — that keeps a lid on new spending and makes a few reductions too, including phasing out middle-class scholarships for the state university system and funding public schools at the bare minimum required by Proposition 98. Without this evasive budgetary action, Brown said, the state would have a $1.6-billion deficit in the fiscal year that begins July 1.

Legislators weren't thrilled with the spending plan outlined by the governor. Republicans griped about the cost of building the high-speed rail line and the two Delta tunnels while the state's roads crumble, and Democrats grumbled that Brown is not spending as much as the state needs to fulfill its obligations to the public.

"The governor's opening budget proposal is typically cautious, with some expected issues and also some areas of concern," Assembly Speaker Anthony Rendon (D-Paramount) said in statement. Specifically, Rendon is concerned about Brown's proposal to cut the Coordinated Care Initiative program, which serves poor and disabled Californians. Rendon suggests it could be fixed rather than scrapped altogether. OK, that's something that can be worked out when budget hearings begin later this year.

But if Democratic lawmakers don't like the governor's "extremely cautious budget proposal," as California Senate President Pro Tem Kevin de León (D-Los Angeles) called it, there is something they can do beyond fight over the scraps. They can find more meat to go around in future years by using their rare supermajority to push through a restructuring of the state's tax system to make it a more dependable revenue source.

Because the state's budget relies heavily on personal income tax and capital gains tax revenues that rise and fall with alarming unpredictability, it must be cautious even when the economy seems good. That's why we and other concerned Californians have been urging a reform in the state's taxing structure for years. (Another broken record.)

Fundamental tax reform is hard to achieve because such a major change inevitably creates winners and losers. Beyond that, it's been little more than a pipe dream because new tax laws require a two-thirds vote, which in past years has meant compromising with Republican legislators whose only interest in taxes was in cutting them. But Democrats' gains in the last election have given them a two-thirds majority in each house, enabling them to overhaul the tax code without a single Republican vote. No longer able to stymie the Democrats, Republicans may finally be motivated to work with the other side on a bipartisan reform proposal.

Democrats may be tempted to use their supermajority to jam more spending into the next budget — and deal with the uncertainty and deficits later. But that would be achingly shortsighted, potentially extending new services to vulnerable Californians only to slash them when times got tough. If there was ever a moment to update the state's unstable revenue picture, this is it.

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