Jerry Brown plays hardball on state budget
Reporting from Sacramento
Gov.-elect Jerry Brown is laying the groundwork for a budget plan that would couple deep cuts to state services, including university systems and welfare programs, with a request that voters extend temporary tax hikes on vehicles, income and sales that are set to expire next year.
The blueprint Brown will unveil when he takes office early next month also is expected to take aim at several tax breaks and subsidies that have been fiercely guarded by the business lobby in Sacramento, according to people involved in budget discussions with the incoming administration.
FOR THE RECORD:
California budget: In the Dec. 29 Section A, an article and accompanying graphic about Gov.-elect Jerry Brown’s plan to balance the budget said he would propose extending a 1% hike in the state’s portion of the sales tax, which was previously 5%, and an increase in state income tax rates of 0.25%. In fact, the proposal calls for continuing a 1-percentage-point rise in the sales tax to 6%, or 20% more than the previous rate. Similarly, the plan would extend an increase in income tax rates of 0.25 of a point, not 0.25%. —
Among the breaks are multibillion-dollar incentives for redevelopment projects and hundreds of millions of dollars of “enterprise zone” credits meant to encourage investment in blighted neighborhoods. Also targeted is a recent change to state business tax formulas that has saved corporate California roughly $1 billion.
The combination of austere spending and extended tax hikes is designed to confront both parties and their allied interest groups with painful choices that Brown says are necessary to truly resolve the state’s massive budget problems. He intends to take swift action, using the political capital of a new governor to confront a deficit that could easily subsume his governorship.
In a symbolic gesture to garner the trust of a skeptical public, Brown has already pledged to cut his own office budget by 25%.
Brown spokesman Evan Westrup declined to discuss any details of the plan, saying: “The time has come for our state government to put its fiscal house in order, and that is what Gov.-elect Brown is doing.”
Brown, who pledged not to raise taxes without voters’ signoff, would face a daunting mid-March deadline to get his proposals onto a special-election ballot. He has said publicly he wants lawmakers to approve a budget within about 60 days. The process usually drags on seven or eight months.
Brown is widely expected to suggest to lawmakers and the public that extending the taxes would stave off even deeper cuts to schools and other services.
His strategy is risky. Voters already overwhelmingly rejected extending the temporary vehicle, sales, and income taxes in May 2009, months after lawmakers and Gov. Arnold Schwarzenegger enacted them.
But political strategists say private polls show that voters are far more willing to extend existing taxes than to levy new ones. The current temporary tax hikes are all due to end by July 1.
“The only politically viable route for long-term remediation of the budget problem is a combination of cuts and continuing the temporary taxes,” said GOP strategist Don Sipple, a volunteer advisor to Brown, though he does not speak for the incoming administration. “You have to do that before the end of the fiscal year when they expire.”
California faces a $28-billion budget shortfall — equivalent to nearly a third of the general fund, which pays for most state programs, including schools, prisons, and health and social services. Extending the temporary taxes would erase up to $9.4 billion of that deficit.
Those taxes included raising the income tax rate by 0.25%, slashing the dependent credit by more than two-thirds, nearly doubling motorists’ annual vehicle license fee to 1.15% of a car’s value and hiking the state sales tax by 1%.
Placing the tax extensions on the ballot could prove difficult. Although Democrats form a majority of a Legislature often beset by partisan gridlock, at least some Republican support would be needed for the required two-thirds vote.
Business lobbyists have argued that the tax breaks spur economic growth, but critics say there is little evidence of their effectiveness and much of the benefit goes to projects that would have gone ahead anyway.
Nevertheless, the business community has fervently argued that rolling back any tax breaks during the current economic slowdown could plunge the state back into a recession.
Labor unions — which spent millions to elect Brown in 2010 — are readying for a ballot battle.
“We’re at the governor’s service, if you will,” said Art Pulaski, executive secretary-treasurer of the California Labor Federation. Pulaski said he did not yet know of the governor-elect’s plans but said that seeking taxes was critical, the most important public vote in a decade.
“Failure is not an option,” he said.
The call for taxes is expected to be paired with a strict spending plan that could rankle the Democrats who dominate the Legislature. Brown warned school officials at a budget forum this month: “Fasten your seatbelt; it’s going to be a rough ride.”
Details of which programs Brown will propose to cut remain unclear. But in private discussions, he has mentioned paring back the state’s welfare program, reducing what doctors and healthcare providers are paid to care for the poor, and trimming funding for the University of California and California State University systems.
Public university students have had to cope in recent years with soaring tuition, furloughed faculty and reduced class offerings. Many programs in the state’s safety net for the poor, meanwhile, have already been reduced significantly from years past.
The business tax breaks and subsidies Brown is targeting have received mixed reviews from analysts and economists.
The state’s enterprise zone program provides tax credits to companies that hire workers from economically disadvantaged neighborhoods. But some of the tax breaks can be claimed for residents of the state’s toniest areas. A 2009 study by the Public Policy Institute of California concluded that, on average, “enterprise zones have no effect on business creation or job growth.”
California’s 400 redevelopment agencies, meanwhile, take in roughly $5 billion in property taxes that would otherwise go to schools and other parts of government. A Times series this year showed that although many use the funds wisely, there were instances of corruption, questionable spending and poor accountability.
The corporate tax formula that Brown wants to change allows businesses to select how they prefer to be taxed each year. The nonpartisan Legislative Analyst’s Office has said the formula should be made mandatory.
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