Bloomberg News

California Democrats Plan No-Tax Budget Vote as Pay Cut Looms

June 15, 2011

June 15 (Bloomberg) -- California lawmakers plan to vote on a Democratic budget that papers over a $10 billion deficit without the tax extensions that Republicans blocked, under pressure of losing pay if they miss today’s deadline.

The plan would delay $3 billion in school funding; sell state buildings for $1.2 billion; siphon $1 billion of cigarette levies from children’s programs and raise $200 million in sales taxes from online retailers such as Amazon.com Inc., according to an Assembly aide briefed on the plan who declined to be identified because details weren’t public.

Governor Jerry Brown, 73, took office in January with a pledge to fix the fiscal malfunctions that have left California with the lowest credit rating for any state from Standard & Poor’s, an A-, seventh highest. Brown, a Democrat, hasn’t persuaded enough Republicans to extend about $9 billion of expiring tax and fee increases that he wants to fix the deficit. Tax bills must win two-thirds of votes to pass, more than Democrats can muster.

“We are determined to pass an on-time budget,” Senate President Pro Tem Darrell Steinberg, a Democrat from Sacramento, said in an interview. “The voters of California gave the Legislature, and the majority party specifically, the authority to pass a budget by a majority vote. So even if we have to act on our own, we will make a significant dent in California’s structural deficit.”

Simple Majority

Democrats in the most populous U.S. state control enough seats to pass the plan, which needs only a simple majority, thanks to a voter initiative in November that lowered the threshold for budget approval from two-thirds. That same initiative strips lawmakers of salary and per-diem pay for every day they fail to meet their June 15 constitutional deadline for passing a spending plan. Brown has until June 30 to sign a budget.

The Legislature met the June 15 deadline just once in the past 25 years. This fiscal year’s budget was passed a record 100 days late as Democrats and Republican Governor Arnold Schwarzenegger were locked in a similar deficit stalemate. In the end, they too passed a budget that papered over most of what was then a $19 billion deficit.

Some of the Democrats’ proposals may face legal challenges, meaning the revenue may never materialize. For example, Brown proposed taking the cigarette-tax revenue in January when he unveiled his budget plan. The governor eliminated that revenue from his budget in May after agencies funded by the levy sued to block the move.

The notion of selling state office buildings revives a plan approved by lawmakers and Schwarzenegger, a Republican, in October. Brown canceled the sale in February, saying it was an example of the budget gimmicks he intended to end.

Sales Tax Change

Democrats also plan to raise about $300 million by adding $12 to the cost of vehicle registration; and get $900 million more by adjusting the sales tax rate, which is scheduled to drop by 1 percentage point, to retain a quarter of that amount. The moves would be structured to get around the two-thirds vote requirement for tax and fee increases.

The Democrats’ proposal would drop Brown’s plan to close more than 400 redevelopment agencies and divert $3 billion a year to schools and local governments. Instead, Democrats would require the antiblight agencies to fork over about $1.7 billion next year and about $400 million annually afterward, though they wouldn’t be shut down. Courts have ruled similar raids aren’t permitted under the state constitution.

Amazon.com Purchases

The budget plan also counts on sales-tax collections by online retailers including Amazon on Internet purchases by state residents. Amazon, the world’s largest online retailer, has threatened to sever ties with more than 10,000 affiliates in California over threats to impose the levies.

Brown began the year facing a $26 billion deficit through June 2012. Spending cuts passed in March and better-than- expected revenue narrowed the projected deficit to $10 billion.

Brown has said for the past six months that he wants a budget that balances spending with revenue and cuts, or erases the deficit with deeper reductions. He has refused to say whether he’d sign or veto the Democratic plan. He has 12 days to decide and could continue to negotiate for his proposal in the meantime.

“I will take a very hard look at it,” Brown told reporters two days ago. “We’ve had discussions with the leadership, and I’ve told them the way I see things, and we’ll see what happens when they bring it down.”

Governor’s Plan

The governor’s plan would retain a 1 percentage-point boost in the retail-sales levy, to 8.25 percent, and a 0.5 percentage- point increase in vehicle-registration fees to 1.15 percent of value. Brown also wants to extend a reduction of the annual child tax credit to $99 from $309. All were put in place in 2009 and are set to expire by July 1.

Brown originally said he wanted a statewide referendum this month asking voters whether they wanted to keep the tax extensions. Negotiations with Republicans over a June ballot faltered in March. Brown recently asked lawmakers to directly extend those taxes until voters are given a chance to decide, possibly as soon as September.

Republicans, who say the extensions would harm California’s economy, instead want lawmakers to pass a budget without prolonging the revenue measures and let voters decide later whether to reinstate them. Republicans have been using their position to maneuver for concessions on spending, cuts to government pensions and changes in business and environmental regulations.

The fear of losing their pay “is a big incentive” for lawmakers, said Senator Bob Huff, a Republican from Diamond Bar who’s vice chairman of the Budget Committee. “It’s introduced into the equation an unhealthy variable because not everyone can absorb that kind of hit, so they may vote for a bad budget, even if they don’t think it represents their district.”

--Editors: Pete Young, Ted Bunker

To contact the reporters on this story: Michael Marois in Sacramento at mmarois@bloomberg.net; Nora Zimmett in Sacramento at nzimmett@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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