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The Associated Press May 16, 2011, 8:44AM ET

CA gov likely to press for taxes in budget update

Gov. Jerry Brown is expected to offer Californians a sobering reminder on Monday of why he believes it's necessary to renew a series of recent tax hikes to balance the state's remaining $15.4 billion deficit despite a rosier economic outlook.

The Democratic governor will release an update to the original budget he proposed in January, when he anticipated general fund spending of $84.6 billion for the fiscal year that begins July 1.

The release of what is referred to in Capitol parlance as the governor's "May revise" also begins anew the negotiations between Brown and state lawmakers, who have just one month left before their constitutional deadline to pass a spending plan.

Brown broke off talks in late March with five Republican senators who seemed willing to deal on his call for higher taxes if he and the Democratic majority conceded on pension reforms for state employees, a state spending cap and regulatory changes to ease the burden on businesses. Brown said Republicans kept changing their demands, making negotiations impossible.

Since then, Brown has continued to trim state government by consolidating agencies and eliminating certain boards and commissions but has failed to make any headway in persuading Republicans to extend the increases enacted two years ago to the personal income, sales and vehicle taxes. He wants the Legislature to authorize a special election so voters can decide whether to renew those tax hikes for another five years.

The governor could opt to release two budgets on Monday. One could include the tax increases while another might show what would happen if the entire deficit is closed solely through spending cuts.

Democratic lawmakers have been stressing that billions more would have to be cut from education, shortening the school year and enlarging class sizes, but Republicans say recent growth in state tax revenue is enough to protect education.

Brown says the tax hikes, which are scheduled to expire by June 30, are crucial to help address California's remaining budget shortfall for the fiscal year that begins July 1.

The governor and Democratic lawmakers already have reduced the original $26.6 billion deficit through spending cuts and transfers between government funds.

Lawmakers have yet to tackle one of the main planks of the governor's plan, a proposal to eliminate some 400 community redevelopment agencies across the state and end a popular business tax credit in distressed areas. The administration has estimated the two changes would save the state about $2.7 billion through June 2012.

Brown also wants to alter a corporate tax break known as single-sales factor to save the state another $1.5 billion. But the governor will have trouble selling his tax plan to Republican lawmakers if tax revenue remains on its current trajectory.

Although the unemployment rate hovers around 12 percent and the housing market remains soft, the state's three main sources of revenue -- the sales, personal income and corporate taxes -- have been trending higher than anticipated, largely as business improves and Wall Street makes gains.

According to the nonpartisan Legislative Analyst's Office, the state has received $2.5 billion more than projected since the fiscal year started last July 1. Personal income tax withholdings are running about 12 percent above the prior fiscal year, suggesting that those who are working are making more money.

Republicans seized on news of the cash influx to argue that extensions of the vehicle, sales and personal income taxes approved in 2009 are unnecessary. The tax hikes mean a single person making $40,000 a year pays an additional $125 in annual income tax, while a couple making $60,000 pays an extra $175 a year.

GOP members in the Assembly released a proposal last week suggesting a way to balance the budget without renewing those tax increases or cutting education. They called for cutting state workers' wages by another 10 percent, taking billions from special funds intended for mental health and early childhood development programs, and making further social service cuts to the poor, disabled and elderly.

"This plan creates a choice for Californians," said Assemblyman Martin Garrick, R-Solana Beach. "Would you rather support a plan that protects education and public safety or a plan that grows government by 31 percent, raises $55 billion in new taxes and puts a priority on welfare programs?"

Assemblyman Bob Blumenfield, D-Sherman Oaks, chairman of the Assembly budget committee, questioned the sincerity of the GOP proposal.

"Assembly Republicans stood aside earlier this year while Democrats acted alone in adopting tough but necessary budget solutions," Blumenfield said in a statement. "There's no proof that Republicans would vote for this plan either."

Brown's struggles to achieve a budget compromise mirror those of former Gov. Arnold Schwarzenegger and are in large part a result of the steep declined in tax revenue that has accompanied the Great Recession. General fund spending has declined nearly 18 percent from the 2007-08 fiscal year, when it was $103 billion.

Funding for K-12 schools alone has dropped over the past two years from $46.2 billion to $36.8 billion.

The release of Brown's updated budget for the next fiscal year comes after a week of protests throughout the state organized by California's largest teachers union, which is concerned about the possibility of even deeper spending cuts to public schools unless the expiring tax increases are renewed.

Some education advocates and lawmakers say a surcharge on the wealthiest Californians should be considered if Republicans defeat the broad-based tax increases. A recent poll shows the majority of Californians support higher taxes on the rich to protect school funding.

A bill by Assemblywoman Nancy Skinner, D-Berkeley, would add another 1 percent onto the tax rate of any taxable income over $500,000. Skinner said that would bring another $2.3 billion a year to the general fund, the state's main checkbook.

She described her legislation, AB1130, as an issue of fairness, making the wealthiest pay a higher tax rate than middle income or working class Californians.

"Part of the volatility is due to the fact we have one and only one tax rate for such a huge range of taxpayers," Skinner said. "Raising the tax rate on the top 1 percent of taxpayers would at least ensure a more consistent higher revenue."


Associated Press writer Lien Hoang contributed to this report.

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