Bloomberg News

Brown Ready to Spend New Taxes as California Budget Mends

January 10, 2013

California Governor Jerry Brown

California Governor Jerry Brown has a fresh $6 billion to spend from higher taxes approved by voters in the biggest state by population, on his pledge to fix years of financial imbalance. He has promised to use restraint. Photographer: Ken James/Bloomberg

California Governor Jerry Brown has a fresh $6 billion to spend from higher taxes approved by voters on his pledge to fix years of fiscal imbalance in the biggest state by population. He has promised to use restraint.

The budget that Brown is to unveil today will lay out how he plans to spend more on education while erasing a deficit that, even after the tax increase, is projected at almost $2 billion by the independent Legislative Analyst’s Office. If the estimate holds, the gap would be the smallest since 2007.

Californians have granted Brown the highest state sales tax in the U.S., at 7.5 percent, and boosted levies on income starting at $250,000 -- reaching 13.3 percent on those making $1 million or more, the most of any state. The increases, which expire within seven years, help fill a recurring gap between spending and revenue that led lawmakers to accumulate $30 billion of internal borrowing that Brown seeks to pay down.

“Most people want to spend more money than the state has, and I will tell you, 2013 is the year of fiscal discipline and living within our means,” Brown, a 74-year-old Democrat, told reporters earlier this week. “I’m going to make sure that happens.”

The budget that’s passed by Brown and Democrats who control the Legislature may have broader implications for the state’s lagging credit rating, and thus its cost of borrowing.

Standard & Poor’s, which last raised California’s grade in 2006, revised its outlook to positive in February. The rating company said it would boost the level within two years if Brown resolved the budget gaps. S&P puts the state at A-, six steps below AAA and lower than any other state.

Bullet Trains

While Brown has promised fiscal repair, he’s also championed spending $68 billion on high-speed passenger trains, building a pair of tunnels 40 miles (64 kilometers) to divert water to thirsty Southern California and indicated he wants to overhaul how the state finances local schools.

Brown’s budget office estimated the higher taxes will raise $8 billion in the year that began July 1 and $6 billion annually after that. The first year is higher because the income-tax increase was effective from the beginning of the 2012 calendar year. Combined with spending cuts and economic growth, the increase may produce a surplus by 2015 if spending is held in check, the legislative analyst said.

Brown will have another $500 million extra to spend from a voter initiative pushed by Thomas Steyer, the former hedge fund chief who was chairman of Farallon Capital Management LLC in San Francisco. The measure stripped out-of-state corporations of an option for lowering their California income taxes. It’s projected to raise about $1 billion annually, with half set aside for the state’s general fund and half for energy- efficiency programs.

Total Spending

The legislative analyst projected in November that general- fund spending in the coming fiscal year would reach as much as $97.7 billion, up from $94 billion this year and $87 billion last year. That’s down from $103 billion in 2008, the most ever, under Republican Governor Arnold Schwarzenegger.

Brown and fellow Democrats in June passed a $130.7 billion budget including special funds that are restricted to certain uses. Including spending from bond proceeds on public works projects, the budget this year is a record $142.4 billion. That’s an 8 percent increase over former Governor Arnold Schwarzenegger’s last spending plan.

“The majority party likes to brag about how general-fund spending has dropped,” said Connie Conway of Tulare, the Assembly Republican leader. “Overall spending has actually grown by $68 billion during the last decade through a game of spending shifts in which the state ‘cuts’ a program out of one pocket but continues funding it through another.”

Supermajority Vote

Brown will revise his budget in May with the latest revenue and spending estimates. Lawmakers have until June 15 to pass a spending plan, or lose their pay until they do.

The budget can be approved on a simple majority vote, thanks to a 2010 initiative that lowered the requirement from two-thirds. Any attempt to raise taxes needs approval by a supermajority, a power Democrats will enjoy for parts of this calendar year.

Democrats have indicated they want to use some of the higher revenue to restore funding for programs that were cut.

“Whatever he describes the deficit at, we know it will be eminently manageable compared to what we have dealt with over the last four or five years,” Senate President Pro Tem Darrell Steinberg, a Democrat from Sacramento, told reporters. “We will live within our means and we will govern responsibly.”

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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