BUDGET DAY PLUS 36 -- He knew he would get the question.
At a late afternoon news conference to discuss the budget, Governor Schwarzenegger attemped to explain his apparent change of heart on whether he'd ever support a tax increase. His answer was complicated... which reflects the reality of the budget mess... even though his earlier statements on the issue were crystal clear.
Foremost on that list of earlier statements: a Schwarzenegger campaign event on August 16, 2006 in Sacramento, where flanked by anti-tax crusaders, the governor removed all earlier doubt about whether he would ever jump on board the Tax Train, as had his Democratic opponent:
Here was his answer last month about the issue at an event in Sacramento:
And here's the governor today, in answering the question I posed to him, suggesting the sales tax increase he reportedly placed on the table was part of a "brainstorming" session:
"Tough decisions have to be made," Schwarzenegger went on to say, also calling for compromises on all sides.
That would seem to be a reasonable request... which is why it's stll so baffling that the governor, up in the polls and the odds-on favorite to beat Democrat Phil Angelides, would have made such an ironclad statement in 2006.
Even someone like me who blogs on news tidbits is amazed at the speed these days with which chatter by various sources can turn into a full blown news story.
Such was the case this afternoon, with two news organizations reporting a possible 1% increase in the state sales tax to close the budget gap, an increase reportedly placed on the negotiating table on Sunday by Governor Schwarzenegger.
Both stories come after the proposal was widely buzzed about in emails, phone calls, and chats all day long.
The governor's office won't comment on the reports, other than to say Schwarzenegger's demand for a budget reform proposal is a big deal.
Setting aside the veracity of the proposal, it's worth noting the many obstacles in the way of a temporary sales tax increase... not the least of which are the no-new-taxes pledge of legislative Republicans, or for that matter, the same long-standing stance of the governor himself.
A 1% sales tax hike first surfaced in May the governor's revised budget, when he said it was a backup plan if voters failed to approve a lottery bond proposal in November to help close the budget gap. At the time, the Legislative Analyst's Office said the proposal would bring in $6 billion in a full fiscal year.
But given that legislative Democrats have pegged the need for new revenues at about $8 billion, that means you still need more cash.
Futhermore, budget watchers say it's important to remember that a sales tax increase doesn't mean that all of that moolah will go to the state's general needs. Nope... thanks to the school funding guarantee, Proposition 98, a portion of those new tax revenues would go directly to education.
And that's not all. If you know nothing at all about Prop 98 (and hey, who does?), know that Prop 98 funding each year is driven by a formula based on the previous year's funding level.
So what happens when the temporary sales tax hike expires? $6 billion in revenues go away... education spending remains at its higher level based on those one-time tax revenues... and now there are new pressures on finding enough cash for all other state government programs. And this scenario doesn't even deal with criticisms that a sales tax increase would most hurt those who can least afford it.
In other words, it's a lot more complicated... and maybe more risky... than it seems.
BUDGET DAY PLUS 17 -- A good example of just how heated the budget impasse is quickly getting can be found today in a dustup over whether legislators are mulling the option of internal borrowing to help erase the $15 billion shortfall.
The borrowing talk has been rampant for weeks in the Capitol, and has been pushed by some Republicans as a better plan than the Democratic call for raising taxes. The most talked-about scenarios involve borrowing money sitting in the accounts of transportation (through 2002's Proposition 42), early childhood development (1998's Proposition 10) and mental health programs (2004's Proposition 63). Some have also suggested exercising the borrowing option from the local government funding measure, 2004's Proposition 1A.
None of this would be easy. The various groups who support such programs will... and already are... howling; some of the money, while technically in the bank, may have already been committed for 2008; and the repayment of said loans only pushes a huge fiscal mess into another year.
The man with the biggest megaphone put the issue out there in today's edition of the Los Angeles Times. Governor Schwarzenegger was quoted as saying it's "not a good idea," though stopping short of refusing to go along with such a plan.
But Democrats, believing that the Times' story implicated them as pitching this plan, fired off angry press releases. "Today’s Los Angeles Times story about state budget negotiations is inaccurate and misleading," said Senate President pro Tem Don Perata in a written statement. Both he and Assembly Democrats emphasized that borrowing isn't a part of their plan -- fair enough, but like Schwarzenegger they, too, stopped short of refusing to vote for such a plan if Republicans hold the line on their no-tax pledge.
If Democrats are willing to consider such a GOP proposal, today's fracas may have set back such talk. But everyone also knows that $15 billion is not an easy gap to close... and in the end, something... spending cuts, taxes, or cuts... will have to give.
BUDGET DAY PLUS 9-- With legislative leaders resuming their private negotiations today over a new state spending plan, it seems worth noting what is... and isn't... negotiable, at least according to their public pronouncements.
Much ado was made yesterday of whether Democrats were drawing the idiomatic "line in the sand" over further cuts in state spending. But it doesn't take a trip out to the beach (which might be nice, considering the Sacramento heat wave continues) to know that sand drawings have a way of... disappearing.
With that in mind, here's a look at -- as of now-- what the political leaders have said they are, or aren't, willing to do.
TAXES: Republicans remain adamant that they're unwilling to accept tax increases as part of a budget deal. Even so, I'm still trying to decipher the words of Assembly GOP Leader Mike Villines in an interview almost a month ago after an anti-tax event on the Capitol steps: "There are going to have to be some things that we look at, potentially with the business community, to help us get out of this, and say, 'You know, if we give you some reforms, can you, you know, help us with some different kind of revenues?"
Of course, one could be persuaded that this isn't really a big deal, because "revenues" may not necessarily be "tax increases."
But the award for mixed messaging on taxes... thus far... must surely go to Governor Schwarzenegger, when asked yesterday whether he was rejecting Democratic calls for increasing taxes:
BORROWING, INTERNAL STYLE: Borrowing is one way of getting those elusive "revenues" without actually raising taxes. While there are pretty strong restrictions now in place on external, Wall Street borrowing (in the wake of Propositions 57 and 58)... there's always the chance that money set aside for other programs and projects could be dipped into to solve the problem. Some Republicans have suggested legislators might want to look at money collected under voter initiatives on tobacco taxes, transportation funding, and even mental health programs. But Senate President pro Tem Don Perata seemed to squelch such talk yesterday, saying it "goes against the promise" made to voters who support those programs.
SPENDING CUTS: This one seems just as hard for Democrats to swallow as a tax hike would be for Republicans. "We can't cut anymore," said Assembly Speaker Karen Bass. "Line in the sand? Yeah."
It will be interesting to see what lines stand the test of time once the budget is finally enacted, and what ones disappear once push comes to shove. As most Capitol watchers know, much longer standoffs than this one have become the norm when it comes to the budget.
BUDGET DAY PLUS 8-- With year after year of California budget impasses scarred by sharp partisan debates over spending versus revenues, it seems almost silly to say that there hasn't been much of a debate about a tax increase. But there hasn't.
And so, in the immortal words of Monty Python, now for something completely different...
Every multi-billion dollar budget deficit over the last few years has been papered over with an elixir of spending deferrals, accounting changes, and borrowing. But this time, the Legislature's Democratic majority seems ready to wield the very budget balancing tool that all of those schemes were designed to avoid: higher taxes.
The budget plan adopted by the joint budget conference committee last night (and, to be fair, adopted without any Republican support) calls for $9.7 billion in additional tax revenues, with more than half that amount coming from higher income taxes for high-income earners. Also in the mix, as reported last night, are more tax revenues from businesses and middle-income earners, as well as a new push to collect taxes that aren't being paid.
Of course, the tax debate isn't new for some Democrats, most notably Senate President pro Tem Don Perata. The Oakland legislator has been calling for new tax revenues for several months, and told reporters today that the proposal on the table is about fairness, in light of several years of cutting back programs and services for the most needy.
"We're asking those who have benefitted the most to pay the most," said Perata.
And pay the most they would. Adding two new tax brackets for wealthy Californians -- a 10% rate for joint returns above $321,000 and an 11% rate for joint returns above $642,000 -- would reinstate taxes levied during the state budget crisis of the 1990s. But those tax increases were temporary; Democratic budget staffers confirmed today that this proposal would make those tax rates permanent.
If enacted, it would mean California would have the highest state income tax bracket for the wealthy in the nation, according to data compiled by the Federation of Tax Administrators. And the very wealthy -- those earning more than $1 million -- would be subject to a 12% rate, because of the surcharge imposed by voters through Proposition 63 in 2004 (money for mental health programs).
Needless to say, Republicans seem almost giddy in these early hours of the debate. "That's a dysfunctional approach to the crisis that we're in," said Assemblymember Roger Niello (R-Sacramento) in comments to reporters this morning. "Those proposals, especially in a weak economy, have been proven time and again not to produce the revenue that's expected."
Niello and his fellow Republicans want more cuts in spending to resolve the $15 billion shortfall; Democrats, who are proposing to close the gap with slightly more in cuts than in tax revenues, adamantly refused such suggestions today. "We can't cut anymore," said Assembly Speaker Karen Bass. And so far, GOP legislators have not submitted specific cuts that would, alone, balance the budget.
So perhaps, for once, there might be a real debate about appropriate taxes and appropriate expenditures. One that forces Californians to think about what services they want, and what they're willing to pay. That would, indeed, be something completely different in the annual summer slugfest over the state budget.
After several weeks of calling for billions of dollars in new tax revenues.. but not actually providing details... legislative Democrats unveiled their proposal late tonight as the joint budget conference committee wrapped up its work on a new spending plan.
The tax hike comes in at $9.7 billion, and will no doubt be met with a chilly reception by Republicans in both houses, many of whom have taken pledges to not raise taxes.
The single largest proposed tax increase is a reinstatement of higher taxes on the most wealthy, a plan that Democrats say would bring in $5.6 billion.
The rest of the extra cash in the tax package:
* Better enforcement of current tax laws, accounting for an estimated $1.5 billion
* Ending a tax break for businesses with net operating losses, for an extra $1.1 billion
* A repeal of a tax adjustment for middle and upper-middle income taxpayers (between $50,000 and $97,000 in earnings), bringing in $815 million
* Rolling back the dependent child credit for high-income earners, amounting to $215 million
* Restoration of a higher tax on many businesses that existed prior to 1997, generating $470 million
The tax package now throws the ball back in the court of GOP legislators, who want to balance the budget through spending cuts alone (and possibly... possibly... some additional borrowing). It also will be interesting to gauge the reaction of Governor Schwarzenegger, whose anti-tax stance is well known... but who has also said all items ought to be on the table when it comes to erasing the current $15 billion shortfall.
Budget discussions this year keep coming back to the issue of tax credits and tax loopholes, and closing some of each to help resolve the state's $15 billion shortfall in the fiscal year that begins on Tuesday.
There are more than 300 tax credits on the books, valued at about $50 billion. But can a budget solution really hinge on removing tax credits?
That's one of the questions examined in my report on this morning's edition of The California Report. And the answer seems to be: probably not.
The big problem is the size and scope of tax credits, exemptions, and deductions on the books. To get the most financial bang, lawmakers would have to go after tax savings laws that are enormously popular. But if lawmakers choose tax credits that aren't widely popular, then they have to erase a heck of a lot of them to make a real fiscal impact.
The discussion also highlights an enormous problem surrounding tax credits and exemptions: they can be placed on the books through a simple majority vote in each house of the Legislature, but taken off the books only with a supermajority vote... becasue such an action is considered a tax increase.
You can hear this morning's story below (a couple of minutes in to the newscast).
Ah, where to begin?
Governor Schwarzenegger's new budget proposal reminds me of the old adage that journalists have used so much that it's become a badge of honor in our profession: if people on both sides of something are mad at me, then I must be doing something right.
Of course, it's never that simple... in the news biz, or with this state budget plan.
The $144 billion spending proposal seeks to erase what the governor's advisers say is a $17.2 billion shortfall (to be fair, it's actually $15.2 billion in red ink, with $2 billion more for a reserve). $9.1 billion of the solutions are spending cuts. Those are, in several cases, serious cutbacks... many in health and welfare programs.
But it's the new revenues the guv is counting on that are getting a lot of the attention.
And more than 60% of those new revenues are found in Schwarzenegger's unusual... and already controversial... plan to sell bonds repaid by future profits from the California Lottery. The governor's team doesn't like that many of us are calling it "borrowing." Call it "securitization," or "selling future lottery profits," they say. But it's also true that the state would be asking for a loan from Wall Street investors for $15 billion in future lottery earnings up front, to be paid back with interest.
Only $5.1 billion of that loaned cash would be used now; the rest would be stashed away. The entire plan would have to be blessed by voters in November, because the lottery itself was created by an initiative in 1984.
The lottery idea isn't a new one. Three other states -- Oregon, Florida, and West Virgina -- have already embarked on somewhat similar lottery bond offerings.
But what is new is the ultimatum that Schwarzenegger and legislators (who'd have to agree to place it to the ballot) would be sending to voters: agree to change the lottery... or the state will enact a 1% sales tax increase.
The threat of a tax increase immediately had legislative Republicans threatening to go to the mattresses. But it may also become perceived as a "give us your money one way or the other" kind of strategy: buy lottery tickets or pay more in sales tax at the register.
And how might you get more people to play the lottery? Many of the ideas were discussed back in March when a state Senate committee considered the idea of lottery privatization: more marketing... perhaps even to younger Californians... more machines in more neighborhoods... and bigger jackpots. Those same kinds of changes are currently enshrined in SB 1679 by Sen. Dean Florez (D-Shafter), a lottery reform bill upon which the governor's plan appears modeled.
But bigger jackpots means that the long-standing guarantee of 34% of lottery sales going to education must be eliminated. And that's raised the ire of the powerful California Teachers Association, which formally opposes SB 1679.
Education's role in lottery revenues would be further diminished by something made explicit today in a Q&A between reporters and Schwarzenegger's budget director, Mike Genest: Wall Street investors would have first dibs at future lottery revenues. "Education revenue is subordinate" under this plan, said Genest.
Something tells me that's going to be a tough pill to swallow.
There will be much more to examine on this issue... and the budget battle... in the coming weeks. But one other thought to ponder on this sweltering day in Sac Town: the lottery proposal and the governor's much ballyhooed budget reform plan both have to be on the November ballot.
The first (and official) deadline for getting them on the ballot is June 26. That's fine if the budget's enacted in time, too, for the July 1 fiscal year. But almost no one in Sacramento thinks that will happen... meaning elections officials could also be scrambling to get these two measures included in the fall lineup.
That title has only been used once before in the California Assembly (and then only under unusual circumstances), but it'll be the buzz word for today when Karen Bass is sworn in as the 67th speaker of the lower house.
Bass hooked the top job several weeks ago, but today formally assumes the title and the power. The 53-year-old Los Angeles Democrat replaces Fabian Nunez at the helm, three months after Nunez's gambit to modify the existing term limits law was rejected by voters.
Speaker Bass spent some time with several Capitol reporters over the past few days, including a brief interview with me late last week.
In such a setting, it quickly becomes clear that she's much more succinct than the often verbose Nunez. That truncated communication style may be the perfect fit for her similarly slim agenda as leader of the Assembly. In almost every recent interview, including ours, Bass has said that there are only three things on her to do list: solving this year's budget mess, examining systemic reform of the state tax code, and strengthening California's overburdened and often neglected foster care system.
Click below to hear my profile of Bass that aired this morning on The California Report.
Aside from the big items on her agenda, a few other comments on recent issues from my interview with the new "Madam Speaker":
Redistricting: Bass says she supports an effort to remove political map drawing duties from the hands of the Legislature... but she's stopping short of an endorsement of the proposal that appears headed for the ballot thanks to the work of Governor Schwarzenegger and government reform groups. In fact, she expressed reservations about the proposal, and a desire to see what might come out of a new effort on the issue pledged by the outgoing Speaker Nunez.
Health care reform: Bass also said she'd like to return to last year's discussion on changes to the state's health care system... and dismisses any speculation that legislative efforts on the issue are all but dead in the near future.
Foster care reform: And back on her pet issue, Bass explained her interest in a future ballot initiative to find a new way of paying for the state's troubled foster care system... and why the needs are so great.
Today's big ceremony in the Assembly chambers will feature a who's who of VIPs, including many of the politicos who once held the job of speaker. And then it's back to work... and Bass' greatest challenger... as Governor Schwarzenegger unveils his much anticipated revised budget tomorrow afternoon.
If you're one of those folks who are following the latest discussions about the fiscal troubles of the state, a word of advice: believe everything. Or nothing. Or something in between.
Spending and revenue estimates in Sacramento are always like the latest fad in fashion... they come and they go. They're hip one day, tragically dated the next. That's been true for years, way before Governor Schwarzenegger took office.
But few other chief executives have sparked so much chatter... and offered so many estimates about the budget... in so few days.
The latest guesstimate came on Monday, when Schwarzenegger told an audience in Garden Grove that the state budget is "$20 billion out of whack." That would lead to a budget crisis second only in magnitude to the shortfall that helped spark the recall of former governor Gray Davis in 2003.
As of yesterday, the official word was that the governor was "speaking rhetorically." Might that then mean that the governor's numbers aren't necessarily rooted in reality? After all, my handy Webster's Dictionary offers one definition of rhetoric as "the use of exaggerated language; bombast."
But today, Capitol reporters were told that the number could, in fact, be real.
"[Schwarzenegger] has internal estimates" that show as much as an additional $10 billion in budget red ink, according to gubernatorial press secretary Aaron McLear. "That's why we need to start working on this now."
McLear declined to reveal any more about those internal projections, though may have more later on whether this is a lack of revenue, an abundance of spending, or both.
But he did lay out a rationale for how you'd get to $20 billion:
The governor's budget team believes that as of this winter the state faced a $7.4 billion deficit in fiscal year beginning in July, down from $16 billion and thanks to a series of possible money saving proposals were enacted. Add to that $2.8 billion, says Schwarzenegger spokesman McLear, for the governor's desired rainy day fund. Then add on the still nebulous $10 billion in new problems... and you get pretty close to $20 billion.
Of course, the rainy day fund isn't really part of the deficit... i.e., an actual shortfall in revenues or an abundance of mandatory expenditures. Take that out and the governor's new number maxes out at a little more than $17 billion.
Now, the caveats. We're still waiting for a clearer picture of revenues. And while the April 15 checks are still being totaled over at the Franchise Tax Board, there's new word that things might be looking better than (or not so bad as) expected. That, however, is only one piece of the revenue pie: there are also corporate tax revenues and sales tax revenues that figure into the issue.
But if the deficit projections start inching toward the big two-oh, it's hard to see how even the governor's 10% across-the-board cuts (strongly opposed by Democrats) would erase the problem. And yes, that probably brings us back to a debate over some kind of a ____ increase.
You can fill in the blank, can't you?