California Assembly and Senate Conference Committee Passes Budget Bill: Floor Votes Presumably to be Scheduled

Polls show Californians don’t want to cut education, shred the safety net, shutter parks or slash health care benefits. Cutting these services would hurt our economy in both the short- and long-term.

The Conference Committee budget is a balanced approach. It closes tax loopholes and rolls back tax breaks for corporations and the wealthy.

The Conference Committee budget restores money to education, health care and public safety thereby providing California the services it needs to bolster the economy and remain strong, livable and competitive in the 21st century.

On the expenditure side, the committee’s plan:

• Provides $2.3 billion more for K-12 education than the Governor recommended.

• Restores $1.5 billion in health and human services the Governor cut. This includes restoring nearly $200 million in health care services to some of the state’s most vulnerable residents, the reimbursement rate for Medi-Cal providers and federal pass-through funds for the aged, blind and disabled.

• Reduces corrections spending by $300 million with a reform package that helps lower the prison population.

• Restores $57 million in financial assistance for college students

On the revenue side, the committee’s plan:

• Reinstates the tax brackets on the wealthiest Californians by reinstating the 10% and 11% tax brackets. Revenue generated: $5.6 billion. California’s personal income tax rates ranges from 1 to 9.3 percent (for taxable income above about $93,000 for joint returns). An additional 1 percent rate applies to incomes about $1 million (that money supporters mental health programs under Prop 63). Under this budget, this proposal imposes a new rate of 10 percent for taxpayers filing joint returns with taxable income above $321,000 and 11 percent for those with incomes above $642,000. This is similar to what Republican Gov. Pete Wilson did in the 1990s.

• Closes a corporate tax loophole for large corporations. Revenue generated: $1.1 billion. California allows companies to carry forward a portion of losses (called Net Operating Losses, or NOL) incurred in one year and use them as a deduction against earnings in subsequent years. These tax breaks are used primarily by large corporations, many of them in the manufacturing and finance area. Companies with more than $5 million in gross receipts account for just 13 percent of total businesses but 80 percent of the NOL deduction. During an earlier fiscal crisis, this loophole was suspended. When the law was reinstated, the percentage of losses eligible to be carried forward was increased from 50 percent to 100 percent. The carry-forward period was also expanded to 10 years. The FTB estimates the value of NOL carried forward exceeded $260 billion as of 2006. The budget suspends the NOL for three years.

• Suspends a tax adjustment for upper-income Californians. Revenue generated: $815 million. In a year which the poor, elderly, and disabled aren’t getting cost-of-living increases for SSI/SSP and CalWORKS, the state shouldn’t be adjusting all of the tax tables for everyone else. Suspension of “indexing” would result in a proportional increase for taxpayers with incomes of up to $97,000 (joint returns), and a flat increase thereafter. As an example, a taxpayer with taxable income of $50,000 would pay about $34 more while a taxpayer with income exceeding $97,000 would pay about $180 more.

• Rolls back a tax loophole for upper-income Californians. Revenue generated: $215 million. Since 1997, taxpayers have received a nonrefundable income tax exemption credit for each dependent – regardless of their income. In 2007 this credit was $294. The LAO recommended making the dependent tax credit the same dollar amount as the personal exemption credit for all taxpayers. That credit was $94 for single taxpayers and $188 for couples. The Conference Committee proposal is a variation of the LAO recommendation. It would roll back the dependent credit for taxpayers with adjusted gross income (AGI) that exceeds $150,000. As a result, it would protect the credit for lower and middle-income households.

• Restores the franchise tax. Revenue generated: $470 million. Virtually all companies are required to pay some amount of corporation tax. The top rate is now 8.84 percent. Prior to 1997, it was 9.3 percent. The Conference Committee proposal rolls back the 1997 tax cut, and restores the 9.3 percent rate.

• Steps up tax enforcement. Revenue generated: $1.5 billion. Modeled after successful tax amnesty efforts in the past, this proposal will collect taxes already owed to the state. Part of this revenue has been owed for years. Part will be an acceleration of revenues that would be paid in the future. This is one-time revenue.

Without revenue increases, the state would have to cut an additional $9.7 billion – about the amount it takes to run the state’s 33 prisons – and more than the cost of the entire UC system.

The Governor’s reduction to K-12 education is equivalent to a cut of $79 per student plus inflation, a step backward that Californians and their children cannot afford.