STATE BUDGET:
Governor Proposes $179 Billion State Budget, Urges Caution

Governor Jerry Brown on January 10 unveiled his $179.45 billion budget proposal for the 2017-18 fiscal year, and repeated his call for tax increases to fund transportation improvements.
Total spending (including special funds and bond funds) in the proposal is 6 percent higher than in the current budget approved last June. The governor’s proposed $122.5 billion in general fund spending represents approximately an 0.04 percent increase in current general fund spending.

The governor also discussed the possibility of a $1.6 billion “deficit,” defined as the situation the state would be in if the current budget was allowed to continue without any changes, and based on revenue projections for the upcoming fiscal year. To address this, he said, he is proposing to keep K-14 education spending at the constitutionally required minimum level (resulting in a $2.1 billion increase compared to the current budget), rather than making large increases.

“The trajectory of revenue growth is declining, … but it is still growing,” Governor Brown said during a press conference at the state Capitol. “California has the most progressive tax system in the United States … but as a corollary, we have one of the most unreliable tax systems.”

The budget includes a $7.87 billion “rainy day” fund, plus $2.5 billion in other reserves. The governor stressed the importance of a strong reserve, in light of the volatility of the personal income tax.
Key elements of the proposed budget:

The governor’s revenue estimates indicate that no “fiscal cliff” effect occurred with the expiration of a 0.25 percent sales and use tax rate on December 31, 2016. Revenue for the sales and use tax is forecast to grow during the 2017-18 fiscal year.

The governor’s budget proposal is the first step in the annual state budget process. The governor will submit a revised budget plan in May, after the state’s personal income tax revenue picture is clearer, and the Legislature has a June 15 deadline for approving a budget bill for the fiscal year that begins July 1.

CalTax Chief Tax Consultant David R. Doerr noted that the document released this week is only the first draft of the 2017-18 state budget. A second draft, which could have significant changes, will surface in mid-May. After that, a different draft will be put together by a two-house conference committee, typically after closed-door meetings between the governor and legislative leaders.

While the first draft is analyzed extensively, Mr. Doerr noted that historically, there has been only a scant description and no analysis of the third draft – the version that must be passed by June 15 in order for legislators to get paid. This year, for the first time, this version of the budget must be in print for at least 72 hours prior to a vote by the full Assembly and Senate, thanks to Proposition 54, approved by voters last November. Mr. Doerr expressed hope that this will permit an analysis of this version of the budget, as it is advertised as the “final” budget (it is not actually the final budget, however, as supplemental appropriations typically are approved later in the fiscal year).

The majority of the questions from reporters at the governor’s press conference related to how various Trump administration actions – such as possible repeal of the Affordable Care Act, or withholding of federal funds from California’s “sanctuary cities” that refuse to follow federal immigration laws – could impact the state’s finances. The governor’s response to many of the questions indicated that he plans to respond to concrete policy proposals from the Trump administration as they occur, rather than reacting to proposals made during the campaign. None of the reporters inquired whether any proposals from the White House might encourage economic activity and increase California’s tax revenue.

The full summary of the governor's budget proposal – including the governor’s dedication of the document to the memory of his recently deceased dog, Sutter – can be found at www.ebudget.ca.gov.


January 13, 2017

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