Bloomberg News

Brown’s Tax Boost Mends California Deficits, Analyst Says

November 15, 2012

Jerry Brown’s Tax Hike Mends California Deficits

California Governor Jerry Brown and lawmakers will need to fill a $1.9 billion deficit through June 2014, the Legislative Analyst’s Office said yesterday, down from $13 billion the office estimate one year ago. Photographer: Ken James/Bloomberg

California’s chronic budget shortfalls that hobbled the most populous U.S. state for a decade may give way to surpluses thanks to voter approval of Governor Jerry Brown’s tax increases, the state’s independent fiscal analyst said.

Brown and lawmakers will need to fill a $1.9 billion deficit through June 2014, the Legislative Analyst’s Office said yesterday, down from $13 billion estimated a year ago. If lawmakers can resist more spending and the economy continues to improve, the state could see a surplus of $1 billion by 2015 and $9 billion by 2018, the analyst’s office said.

Voters in California, which hasn’t had a budget surplus in a dozen years, approved higher sales and income taxes Nov. 6, the first statewide increase since 2004. Brown pressed for the higher levies to help erase a $16 billion deficit in the year that began July 1 and to assist in repaying loans used for the past 12 years to paper over $213 billion in combined shortfalls.

The new taxes, together with economic recovery and budget cuts, may spell the “end of a decade of acute state budget challenges,” Legislative Analyst Mac Taylor said in the report yesterday. “There is a strong likelihood that the state will have operating surpluses” if the economy continues to grow and lawmakers keep spending under control.

Voters agreed to boost the sales levy to 7.5 percent from 7.25 percent, and raised tax rates on incomes starting at $250,000. Those making $1 million will now pay 13.3 percent, the most of any state. Brown’s budget office estimated the increases will raise $8 billion in the year that began July 1 and $6 billion annually before expiring by 2018.

‘Validates’ Efforts

“This report validates the hard work the state has done to cut its deficit and balance its budget,” Brown said in a statement. “California is now on the path for a fair and sustainable budget as long as we continue to exercise fiscal discipline and pay down debt.”

Standard & Poor’s, which rates the state’s credit A-, six levels below AAA and lower than any other U.S. state, has said the tax increase was a positive development.

Jordan Levine, director of economic research at Beacon Economics LLC in Los Angeles, said the recovery has broadened out to most sectors of the state’s economy. Housing and construction are on the rise, as is consumer spending, Levine said, and he projects the state’s unemployment (USUSCALI:US) rate will fall below 10 percent from the current 10.2 percent.

“We do see the economy continuing to grow,” Levine said in an interview. “In fact, we are forecasting it to pick up a little bit of steam as we get into 2013 and 2014.”

Fiscal Cliff

Taylor said his projections assume U.S. lawmakers will find a way to avoid driving the U.S. economy off the “fiscal cliff” of scheduled tax increases and federal spending cuts set to take effect next year.

California’s deficit was narrowed by an accounting method that found $1.4 billion from last fiscal year that had been unaccounted for, Taylor said. Without that, the latest shortfall would be larger.

The state’s finances have been helped by a decision California lawmakers made in 2009 to eliminate automatic cost- of-living increases and inflation adjustments that were built into most state programs.

California voters gave Democrats two-thirds majorities in both chambers of the Legislature. In the deciding race in Orange County, Sharon Quirk-Silva unseated incumbent Republican Assemblyman Chris Norby, 51 percent to 49 percent, the Associated Press said yesterday. Such supermajorities offer Democrats veto-proof power to raise taxes or increase spending. The last time one party held such majorities in both chambers was in 1933.

Pay Debt

“While there is not a near-term surplus, the analysts project a $9 billion budget surplus by 2018,” Senate President Pro Tem Darrell Steinberg, a Democrat from Sacramento, said in a statement. “This opens opportunities to plan for the future with three important goals: pay down debt, set aside resources for unforeseen economic downturns, and reinvest in public and higher education, health and human services, and public safety.”

The latest shortfall includes a $943 million deficit in the current fiscal year and $936 million more in the year beginning July 1. Brown must make his budget proposal for the coming year to the Legislature in January.

California may collect about $626 million less than projected in tax revenue from Facebook Inc. (FB:US)’s initial public offering, after share prices of the social media company declined by almost half since May, according to the analyst’s report. Still, income taxes not from initial public offerings are expected to rise $413 million above estimates, offsetting the Facebook shortfall, according to the report.

Redevelopment Savings

State spending will exceed budgeted levels by $2.7 billion for the current fiscal year, mostly because half the benefits of abolishing local redevelopment agencies probably won’t materialize, the analyst said.

California also may not be able to use $400 million from the auction of carbon allowances to offset general-fund spending as planned, the analyst’s office said. The California Air Resources Board yesterday sold the first greenhouse-gas allowances, brushing aside a lawsuit challenging an auction intended to start the largest U.S. cap-and-trade program.

“We still have a lot of catching up to do,” Taylor said

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

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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