Governor Jerry Brown and democrats in the California
Legislature have a lot riding on proposition 30 this year in the golden state.
It is no secret that California has suffered 6 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 2years. 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 6th 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, and instead, went along with a scheme to balance the majority-vote
budget on the come assuming $6 billion in annual new tax revenues in 2012-13
and beyond when it predicated the state’s budget on passage of a large personal
income and sales increase to be approved by the voters on the November 6th
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 9% depending on local
jurisdiction) by one quarter cent for everyone for four years. In addition, it
would raise the state’s top PIT rate by up to three percent to 12.3% on
individuals making more than $680,000 annually and 13.3% for those making more
than $1 million. The PIT tax increase would stay in effect for 7 tax years
through 2018 and then sunset with the highest rates falling back to 10.3% 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 or “RAN” which Sacramento needed to finance the cash flow of
the 2012 budget plan. The RAN must be
paid back by June 30th 2013 and failure of proposition 30 would make
that impossible without the trigger cuts.
However, many believe that if proposition 30 were to fail (looking
more likely now that Prop-38 proponents are spending millions to defeat
Prop-30), 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 12th 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 3rd. 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
tuff votes than the new crowd that would be sworn in in December. This is
because a number are termed out of office and will not be seeking future
political posts. While possible, it is unlikely that another attempt at tax
increases would be attempted. 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 for sure, we have not likely heard the
last of California’s fiscal woes.
