ARTICLE
It is hard to imagine after nearly two years of a pandemic that California is projected to have another big budget surplus next year. Independent legislative analyst Gabriel Petek calculated that figure last week but cautioned he could be way off. The actual state budget surplus could range from $60 billion down to $10 billion, he reported. H.D. Palmer, the State finance department spokesperson, said that the $31 billion number is more reasonable. No matter the projected dollar amount — it's more than anticipated when the Governor and the legislature approved the current $263 billion budget in June. According to the Legislative Analyst’s Office’s analysis, tax revenues are growing at historic rates — all types of revenue: income, corporate and sales. Underlying this growth is retail sales that have posted double-digit growth in 2021, and stock prices have doubled from the pandemic low last spring. Tax revenue is higher by nearly $28 billion compared to budget act estimates. the growing surplus, we must now look at Proposition 4 — the Gann Limit approved by voters in 1979. Under the Gann measure — officially called the State Appropriations Limit — Sacramento’s spending was limited by inflation and population growth. Until recently, inflation was low. Population is stagnant. The original act decreed that if the limit was reached, the surplus money had to “be returned” to taxpayers “by a revision of tax rates or fee schedules.” The law was later amended to split the surplus 50-50 between taxpayers and schools. So where will this new pot of money be spent? Under the law’s current interpretation, the excess revenue can be used in three ways: >Taxes can be cut; >The money can be split between taxpayer rebates and K-14 schools; and >It can be spent on such things as public works projects, local government aid, paying off debt and emergencies. Governor Newsom stated that last year’s budget led to the largest tax rebate of any state in US history — $12 billion. The Governor further noted that the surplus was used to increase reserve funds, reduce pension obligations, help small businesses, double earned income tax credits for low income people, expand childcare and generally strengthen the social safety net. He will present the FY 2022-2023 State Budget in January 2022 outlining his priorities, and then we are off to the budget process that would conclude with a final budget in June 2022. The great unknown is whether the revenue projections will materialize when tax season hits us. So let's think linearly on the next steps of utilizing this surplus. We know by common practice, the Governor and Legislature will look to fund special projects that please their various constituencies whether those be schools, childcare services, or offering assistance to lower-income and elderly populations, for example. Currently back in Washington DC, the House of Representatives passed the Build Back Better plan, which includes a $1.85 trillion spending bill. It is certain that the US Senate will modify that legislation to accommodate two senators who want to trim the cost of the bill. It appears, nonetheless, additional funding from Washington will flow to the states, complementing the previously approved infrastructure funds. Here is an interesting twist: One of the specific points of contention is something that would have multi-billion-dollar impacts on California — a partial repeal of the $10,000 cap on income tax deductions for state and local taxes, dubbed SALT. The cap, part of a Republican tax overhaul signed by former President Donald Trump in 2017, hit high-tax states such as New York and California hard. It indirectly raised federal taxes on their high-income residents and, state officials worried aloud, encouraged them to either migrate to other states with lower taxes or otherwise reduce their tax exposures. California’s Franchise Tax Board estimated in 2018 that the SALT deduction limit cost Californians an additional $12 billion a year in federal taxes. Senator Chuck Schumer, (D-NY) and House Speaker Nancy Pelosi (D-CA) have been trying ever since the cap was imposed to either repeal or modify it, and the governors of affected states, including California’s Gavin Newsom, have been pushing hard for a change. The version of Biden’s package that emerged from the House would raise the cap to $80,000 through 2030, then reduce it back to $10,000 in 2031 before allowing it to expire in 2032, seven years after the current 2025 expiration date. The manipulation of SALT deductions is aimed at making it pencil out, on paper, as a net gain in federal revenue over the long term. So the die is cast where the White House and the leading Democrats want the cap modified. This will cause consternation between the more liberal members of the Democratic party. Oh, the making of funding policies in the age of divided government.
It is hard to imagine after nearly two years of a pandemic that California is projected to have another big budget surplus next year. Independent legislative analyst Gabriel Petek calculated that figure last week but cautioned he could be way off. The actual state budget surplus could range from $60 billion down to $10 billion, he reported. H.D. Palmer, the State finance department spokesperson, said that the $31 billion number is more reasonable. No matter the projected dollar amount — it's more than anticipated when the Governor and the legislature approved the current $263 billion budget in June.
According to the Legislative Analyst’s Office’s analysis, tax revenues are growing at historic rates — all types of revenue: income, corporate and sales. Underlying this growth is retail sales that have posted double-digit growth in 2021, and stock prices have doubled from the pandemic low last spring. Tax revenue is higher by nearly $28 billion compared to budget act estimates. the growing surplus, we must now look at Proposition 4 — the Gann Limit approved by voters in 1979. Under the Gann measure — officially called the State Appropriations Limit — Sacramento’s spending was limited by inflation and population growth. Until recently, inflation was low. Population is stagnant. The original act decreed that if the limit was reached, the surplus money had to “be returned” to taxpayers “by a revision of tax rates or fee schedules.” The law was later amended to split the surplus 50-50 between taxpayers and schools. So where will this new pot of money be spent? Under the law’s current interpretation, the excess revenue can be used in three ways:
>Taxes can be cut; >The money can be split between taxpayer rebates and K-14 schools; and >It can be spent on such things as public works projects, local government aid, paying off debt and emergencies.
Governor Newsom stated that last year’s budget led to the largest tax rebate of any state in US history — $12 billion. The Governor further noted that the surplus was used to increase reserve funds, reduce pension obligations, help small businesses, double earned income tax credits for low income people, expand childcare and generally strengthen the social safety net. He will present the FY 2022-2023 State Budget in January 2022 outlining his priorities, and then we are off to the budget process that would conclude with a final budget in June 2022. The great unknown is whether the revenue projections will materialize when tax season hits us.
So let's think linearly on the next steps of utilizing this surplus. We know by common practice, the Governor and Legislature will look to fund special projects that please their various constituencies whether those be schools, childcare services, or offering assistance to lower-income and elderly populations, for example.
Currently back in Washington DC, the House of Representatives passed the Build Back Better plan, which includes a $1.85 trillion spending bill. It is certain that the US Senate will modify that legislation to accommodate two senators who want to trim the cost of the bill. It appears, nonetheless, additional funding from Washington will flow to the states, complementing the previously approved infrastructure funds.
Here is an interesting twist: One of the specific points of contention is something that would have multi-billion-dollar impacts on California — a partial repeal of the $10,000 cap on income tax deductions for state and local taxes, dubbed SALT. The cap, part of a Republican tax overhaul signed by former President Donald Trump in 2017, hit high-tax states such as New York and California hard. It indirectly raised federal taxes on their high-income residents and, state officials worried aloud, encouraged them to either migrate to other states with lower taxes or otherwise reduce their tax exposures.
California’s Franchise Tax Board estimated in 2018 that the SALT deduction limit cost Californians an additional $12 billion a year in federal taxes. Senator Chuck Schumer, (D-NY) and House Speaker Nancy Pelosi (D-CA) have been trying ever since the cap was imposed to either repeal or modify it, and the governors of affected states, including California’s Gavin Newsom, have been pushing hard for a change. The version of Biden’s package that emerged from the House would raise the cap to $80,000 through 2030, then reduce it back to $10,000 in 2031 before allowing it to expire in 2032, seven years after the current 2025 expiration date. The manipulation of SALT deductions is aimed at making it pencil out, on paper, as a net gain in federal revenue over the long term.
So the die is cast where the White House and the leading Democrats want the cap modified. This will cause consternation between the more liberal members of the Democratic party. Oh, the making of funding policies in the age of divided government.