State Budget

Newsom Proposes $227 Billion Budget With Continuation of Business Tax Hike


Governor Gavin Newsom this morning unveiled a $227.2 billion state budget proposal – roughly $25 billion higher than the budget enacted last summer – that continues the business tax increases approved in last year’s budget.

The Department of Finance acknowledged revenue forecast mistakes in the 2020-21 budget, with the director of the department telling reporters: “We got it wrong.”

Last year’s AB 85 (Assembly Budget Committee), which the department said was critical to closing a budget shortfall that is now a surplus, was projected to raise $9.2 billion over a three-year period by suspending the net operating loss deduction and placing a limit of $5 million per year on business tax credits – including the research-and-development credit.

“We’re proposing no [additional] tax increases,” Newsom said during an online press conference that began at 11 a.m. and lasted approximately two hours. He added that wealth taxes and income tax increases “are not part of the conversation.”

Asked by a reporter if the budget includes any provisions to make California taxes more competitive with taxes in other states, Newsom said California’s universities, availability of venture capital and other benefits make the state attractive to entrepreneurs. While California isn’t the cheapest state for business, the state “has the best ecosystem” of benefits for businesses, he said.

“The state is still this remarkable, remarkable home to more dreamers and doers than any other part of the globe,” Newsom said. He said the state “has a lot to do to clear that record” to address what he characterized as misunderstandings by the public. After discussing his background in business, Newsom said: “There’s no state on planet earth that I’d rather do business in, … at the same time, we have to be mindful about a competitive landscape.”

The budget anticipates a $4.6 billion increase in total revenue compared to the 2020-21 fiscal year, including a 5 percent increase in personal income tax revenue, mitigated by a 2.2 percent decrease in sales and use tax revenue and a 1.8 percent decrease in corporation tax revenue. The budget also projects that local property tax revenue will increase 4.6 percent in 2020-21 and 5.6 percent in 2021-22.

“Our forecast into the future is very, very, very tenuous,” Newsom warned, citing the pandemic and other unknowns. “Prudence, fiscal discipline … is what this moment calls for.”

The budget summary states that revisions made in May will account for economic changes prompted by the deployment of COVID-19 vaccines, changes in the stock market and changes in employment levels.

The budget proposal includes:

Record Reserves. Newsom said total state reserves are projected to be $22 billion. This is “a record high,” he said, at approximately $1 billion higher than projected one year ago, prior to the pandemic.

Record High Spending on Education. Proposed education spending totals $85.8 billion. Newsom said this is “the highest investment per pupil that that state has ever, ever advanced.”

Stimulus Payments. The “Golden State Stimulus” – a $600 payment, in the form of a refundable income tax credit, to approximately 4 million low-income Californians. The money would be sent to all 2019 taxpayers who received a California Earned Income Tax Credit (CalEITC) in 2020, as well as to 2020 taxpayers with Individual Taxpayer Identification Numbers (ITINs) who are eligible for and receive the CalEITC in 2021. The Governor’s Office said the money will help those who get federal stimulus money and “will also reach low-income Californians who are excluded from the federal stimulus, like undocumented households that file taxes with an Individual Taxpayer Identification Number (ITIN), including parents with U.S. citizen children.”

According to the Governor’s Office, the payments would be sent out to tax year 2019 CalEITC recipients beginning next month – several months prior to the Legislature’s approval of the complete budget.

The plan also includes provisions to extend last year’s legislation that established a moratorium on evictions for non-payment of rent due to COVID-19 financial hardship, subject to conditions. This also would take effect in advance of the final budget, as the current law expires January 31.

“California Jobs Initiative” Including Limited SUT Exclusion. The governor proposes $777.5 million in “sustained investments to preserve California’s competitiveness” through the California Jobs Initiative, which includes:

  • $100 million for an expanded sales tax exclusion through the State Treasurer’s Office “to reduce the cost of manufacturing equipment in order to promote innovation and meet the state’s climate goals.”
  • $430 million for the California Competes Tax Credit.
  • $100 million for the Extended Main Street Small Business Tax Credit.
  • “Mitigating the SALT deduction limitation” for S corporation shareholders.
  • $35 million for the California Dream Fund “to seed entrepreneurship and small business creation in underserved communities.”
  • $50 million in additional funds for the California Infrastructure and Economic Development Bank’s Small Business Finance Center to provide small business loan and disaster loan guarantees (the Governor’s Office said some of the funds “will be leveraged to provide $250 million in loans”) and for the California Rebuilding Fund.
  • $12.5 million that was allocated in late 2020 “to fully capitalize the California Rebuilding Fund to support $125 million low-interest loans to underserved businesses.”

Grants to Small Businesses, Museums and Art Galleries. The budget proposes $1.075 billion for the Small Business COVID-19 Relief Grant Program, including “immediate legislative action on $575 million in additional grants.” The money would add to a $500 million allocation announced in November. The program offers grants up to $25,000 to micro and small businesses that have been affected by the pandemic. “The $575 million Early Action Budget proposal includes $25 million for small cultural institutions, such as museums and art galleries, that have been constrained by the pandemic in their ability to educate the community and remain financially viable,” the Governor’s Office stated.

Workforce Development. The budget proposes $353 million to support various workforce development strategies, including apprenticeships and training programs.

Fee Waivers for Businesses Forced to Close. The budget proposes $70.6 million for fee waivers to “individuals and businesses most impacted by the pandemic – including barbers, cosmetologists, manicurists, bars and restaurants.”

Infrastructure Spending. “In recognition of the job-creating potential of infrastructure projects on state-owned properties,” the budget includes $300 million for deferred maintenance, including the “greening of state infrastructure.” Projects would include the installation of electric vehicle charging stations at state-owned facilities.

Housing. The budget proposes $500 million for the Infill Infrastructure Grant (IIG) Program for grants to local governments and developers to “bring the cost down for new housing by defraying costs for things like sewers, roads and site preparation, all while putting thousands of people to work in good jobs building this housing-related infrastructure.”

Zero-Emission Vehicles and Infrastructure. Newsom proposes $1.5 billion to “support purchases of clean trucks, buses and off-road freight equipment and Clean Cars 4 All programs.” The Governor’s Office said the spending “will also support job-creating construction of electric charging and hydrogen fueling stations necessary to accelerate zero-emission vehicle adoption.”