State Budget

Lawmakers Begin Budget Hearings

Sacramento Capitol

The Senate Budget and Fiscal Review Committee held a two-hour hearing January 19 to get an overview of the governor’s budget proposal from the Department of Finance and Legislative Analyst’s Office.

The meeting in the Senate chambers, with testimony provided remotely and shown on large television screens, was for informational purposes only, and no votes were taken. Senator Nancy Skinner, who chairs the committee, said the Senate’s five budget subcommittees will continue holding hearings through the first week of March, and there will be “more in-depth discussions” in those forums.

Skinner said Senate Democrats want the Legislature to focus on “building a future that is more equitable for Californians.”

The bulk of the state’s revenue windfall has come from the state’s personal income tax, which is steeply progressive and thus dependent on high-income residents. In tax year 2019, the most recent tax year for which data is available from the Franchise Tax Board, the top 5 percent of California resident earners accounted for 66.3 percent of the personal income tax revenue total. PIT revenue will account for 62.4 percent of the state’s total revenue in the current fiscal year, and that share is projected to increase to 65.9 percent in the next fiscal year.

“The state is continuing to experience record economic growth, and that, on top of fiscal prudence, really gives us more opportunity to build on our past investments and strengthen the foundation of our future,” said Erika Li, chief deputy director of the Department of Finance, in her overview of Newsom’s proposal.

While Li focused on provisions relating to small businesses, she noted that the budget “restores the business tax credits, including research-and-development, which were limited during the COVID-19 pandemic recession, and proposes two new green tax credits.”

Li also highlighted a provision to pay down $3 billion of the state’s approximately $20 billion in unemployment insurance fund debt over two years.

Legislative Analyst Gabe Petek urged lawmakers to “preserve legislative flexibility … and continue to strengthen the state’s fiscal resilience,” especially since inflation and the pandemic create a lot of uncertainty.

Petek noted that Newsom’s budget projects that approximately $2.6 billion in changes will be needed to keep the state under the state appropriations limit (SAL), commonly referred to as the Gann limit, but defers a detailed plan until May.

“That’s one approach, but we would actually encourage the Legislature to begin thinking about developing a plan for meeting the SAL requirement before May,” Petek testified. “The reason for this is that delaying the formation of a plan really reduces legislative flexibility.”

For example, Petek said, if revenue continues beating projections and the Legislature wants to reduce taxes, earlier action will provide more benefit to the taxpayers.

Petek also urged lawmakers to focus on how money is being spent, rather than just how much is being spent.

“Given the magnitude of last year’s commitments, it may be appropriate to dedicate some portion of the early part of the budget process this year to checking in, essentially, on how that is going,” Petek said. “How is the implementation of those choices going, how is the rollout of the funding working, and sort of performing, basically, some form of an oversight function in that process. Relatedly, we would recommend that the Legislature continue to be cautious about creating new or significantly expanded … programs, just bearing in mind the state’s overall capacity to implement these new initiatives.”

Petek added that the pandemic could be “an ongoing or a longer-term issue for us all to deal with,” and recommended that lawmakers consider the governor’s budget in that light.

The Assembly Budget Committee has scheduled a similar budget overview hearing for January 26.