Democratic legislative leaders announced June 1 that they have reached a budget agreement and will now negotiate with Governor Gavin Newsom over differences between their $267.1 billion plan and the $267.8 billion budget proposed by the governor.
The legislative budget largely mirrors the governor’s plan and proposes $196.1 billion in general fund spending, compared to $196.8 billion in Newsom’s proposal. Both plans represent significant increases from the $165.2 billion in general fund spending in the budget approved last summer, and either would be the largest state budget in California history.
The Democratic leaders’ budget uses the Legislative Analyst’s Office (LAO) revenue forecast, adjusted for higher final payments in the final month of the current fiscal year. “Over the prior year, current year, and budget year, the LAO’s initial estimates are $4 billion higher than the Administration’s May Revision estimates,” according to a summary of the legislative budget. The legislative plan also assumes revenue growth of approximately 4 percent through 2024-25, compared to approximately 2.1 percent in the governor’s budget. By 2024-25, the analyst’s forecast is approximately $20 billion higher than Newsom’s.
Under the state constitution, the Legislature has a June 15 deadline to send a budget bill to the governor.
The budget agreement was announced via a joint statement from Senate President Pro Tem Toni Atkins, Assembly Speaker Anthony Rendon, Senate Budget and Fiscal Review Committee Chair Nancy Skinner, and Assembly Budget Chair Phil Ting.
CalTax and the California Chamber of Commerce have asked lawmakers and the governor to add budget provisions to sunset last year’s AB 85, the $9.2 billion tax increase that limits the utilization of business tax incentives and prohibits the utilization of net operating losses until 2023. Last year’s tax increase was enacted because the Governor’s Office anticipated a $54 billion deficit. With record reserves of $24.4 billion, a $75.7 billion revenue windfall from higher-than-anticipated tax revenue, and $27 billion in federal stimulus dollars, CalTax and CalChamber said it is clear that the limitation on tax incentives and prohibition of NOLs are not necessary.
Republican Assembly Member Vince Fong questioned a Newsom administration representative about the AB 85 tax increases during a June 2 hearing of the Assembly Budget Committee, noting the revenue windfall and asking, “Why would we not undo the tax increases?”
The administration representative said the AB 85 changes “affected large corporations … and entities that were weathering the pandemic well,” and the governor has opted to prioritize relief for small businesses and others. When Fong pressed for more information on whether the administration plans to “leave the tax increases there for two more years,” the representative reiterated his statement about the focus on other priorities.
The legislative budget includes the governor’s “Golden State Stimulus” payments of $500 to every household with income below $75,000 a year, but characterizes the $8.1 billion cost as a reduction in revenue rather than as new spending. The legislative budget also follows the legislative analyst’s recommendation of launching fewer new social programs than proposed by Newsom.
During a June 2 hearing of the Senate Budget and Fiscal Review Committee, Skinner questioned Department of Finance representative Erika Li about the administration’s revenue growth projection being much lower than the legislative analyst’s. Li said the issue shouldn’t be a debate over whose projection is right, but rather that a cautious approach ensures there is less risk of the budget going out of balance.
Skinner took issue with Li’s approach, and said the state will be better off if the budget includes more spending based on the higher projections. “We can actually improve lives now, whereas the cautious approach might not,” Skinner said.