Bloomberg News

California Lawmakers Pass No-Tax Budget as Deadline Looms

June 15, 2011

(Updates with Assembly passage in first paragraph, T. Rowe Price fund manager comment in third paragraph.)

June 15 (Bloomberg) -- California’s Legislature passed a Democrat-written budget that papers over a $10 billion deficit without extending higher taxes blocked by Republicans, as lawmakers beat a midnight deadline to pass a plan or lose pay.

The Assembly and the Senate approved plans that 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.

“We’re really not seeing any structural changes, it’s kind of status quo,” said Konstantine “Dino” Mallas, manager of the T. Rowe Price California Tax-Free Bond Fund, in a telephone interview from Baltimore. “We’d like to see more substantive changes to the budget.”

California, with the largest economy in the U.S., has the lowest credit rating for any state from Standard & Poor’s. Governor Jerry Brown’s preferred plan for balancing the budget is to extend about $9 billion of expiring tax and fee increases to fix the deficit. He hasn’t persuaded enough Republicans to back the extensions. Tax bills must win two-thirds of lawmakers’ votes to pass, more than Democrats can muster.

Brown, a 73-year-old Democrat, hasn’t said whether he will sign the Democratic plan. He has 12 days to sign or veto the budget or it automatically becomes law. He could continue to negotiate for his proposal in the meantime.

Simple Majority Vote

Democrats in the most-populous U.S. state control enough seats to pass their no-tax plan with a simple majority, thanks to a voter initiative in November that lowered the threshold for budget approval from two-thirds. That initiative also strips lawmakers of salary and per-diem pay for every day they fail to meet a constitutional deadline of June 15 for passing a spending plan for the year beginning July 1.

“As usual, the politicians under the Capitol dome are looking out for themselves,” said Jon Coupal, president of the Howard Jarvis Taxpayers Association, which in 1978 sponsored Proposition 13, California’s property-tax limit. “They are so desperate to pass a budget -- any budget -- in order to keep their pay, they are willing to use any means, including illegal maneuvers and gimmicks, in order to do so.”

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.

Legal Challenges

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 in October. Brown canceled the sale in February, saying it was an example of the budget gimmicks he intended to end.

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 local sales tax rate, which is scheduled to drop by 1 percentage point, to retain a quarter of that amount.

Redevelopment Funds

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 anti-blight 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.

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.

Governor’s Plan

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.

“I will take a very hard look at it,” Brown said of the Democratic plan 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.”

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.

--With assistance from Christopher Palmeri in New York. Editors: Pete Young, Mark Tannenbaum

To contact the reporter on this story: Michael Marois in Sacramento at mmarois@bloomberg.net

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


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