State Budget

Newsom Proposes Budget With Business Tax Relief Provisions

On January 10, Governor Gavin Newsom released his budget for the 2022-23 fiscal year, a $286.4 billion plan that proposes restoration of business tax credits (including research-and-development credits) and net operating loss deductions that were limited by AB 85 of 2020.

“Taxpayers applaud the administration for making this a priority and sending a signal that California values the importance of R&D,” CalTax President Robert Gutierrez said.

The budget also proposes spending $3 billion over two years to repay debt in the Unemployment Insurance Fund. By reducing the debt owed to the federal government, the repayment would reduce employer taxes that otherwise would be triggered. The $3 billion payment is only a fraction of the approximately $20 billion in debt, however.

The proposal also would suspend this year’s inflation adjustment for the state gasoline and diesel excise taxes.

Newsom did not propose any broad-based tax increases.

The total spending in the governor’s proposal – including the general fund and special funds – represents a 9.1 percent increase from the budget for the current fiscal year, or roughly $23.8 billion in new spending.

Newsom highlighted two proposed tax credits “to encourage climate innovation”: $250 million in cumulative credits for “companies investing in activities and technologies that mitigate climate change and are headquartered in California,” and $100 million in credits for “those that opt in to develop green energy technology.” Both credits would be available from 2022 to 2024. The governor’s budget summary states that the $100 million credit would “fund pre-development costs for new technologies such as: electric vehicle manufacturing and infrastructure; geothermal, lithium extraction, and battery manufacturing; long-duration storage; addressing methane emissions; and hydrogen technologies to reduce the use of natural gas.”

Other key features of the proposed budget:

  • Surplus. The Governor’s Office said the revenue surplus – the total projected revenue above the amount of projected spending for the fiscal year – is now more than $45.7 billion. Much of this comes from personal income taxes on high-income earners. The discretionary amount of the surplus, not restricted by various legal requirements, is $20.6 billion, the governor’s finance director said. The legislative analyst has projected the discretionary amount at approximately $31 billion.
  • Reserves. The total in the state’s various reserve funds would be $34 billion, a new record.
  • Education Spending. Public education spending would increase to $20,855 per pupil from $15,261 in the current year, establishing a new record high. EdSource noted that under the proposal, “K-12 schools and community colleges will have $24 billion more to spend next year,” as “funding for schools and community colleges will rise to more than $100 billion for the first time.”
  • The State Spending Limit. Under the proposal, the state would be $2.6 billion over the state spending limit (the Gann limit), Newsom said, so this amount would need to go to education or back to the taxpayers. He said he will wait until the May revision to use updated figures and make a determination about how to comply with the spending limit. Days after releasing the budget, Newsom told reporters: “We expect in the May revise language when I update the budget that we are likely to have an additional rebate to the taxpayers. … No new taxes in our budget.” He did not provide details about whether the envisioned rebates would be broad-based or targeted to people with adjusted gross income of $75,000 or less, as were last year’s “Golden State Stimulus” payments.
  • Expansion of Medi-Cal, but No Single-Payer Program. Newsom proposed a $2.2 billion expansion of the existing Medi-Cal program to cover “full-scope Med-Cal coverage … for all low-income Californians, regardless of immigration status,” starting in January 2024. This would expand to all ages the coverage now provided to people under 26 or over 50. This will not require a tax increase, he said. The governor said he has “never been more convinced” that single-payer is inevitable in the United States, and noted that he has established a commission to study the issue, but later in the week expressed concerns about the feasibility of legislation introduced by Assembly Member Ash Kalra (AB 1400).  “Ours is funded, ours is budgeted,” Newsom said while comparing his proposal to Kalra’s. “When you’re governor, you’ve got to be in the ‘how’ business,” he added.
  • Gas Tax. The state excise taxes on gasoline and diesel fuel would not be increased for inflation on July 1. The governor said this “gas tax holiday” would avoid a $523 million tax increase, and that the general fund will provide this amount to transportation projects to keep their funding whole. Absent any change, the California Department of Tax and Fee Administration is required to adjust the tax rates each year based on the percentage change in the California Consumer Price Index as calculated by the Department of Finance. Because the annual inflation adjustment was approved in past legislation with a two-thirds vote, the yearly tax increases do not require annual approval by the voters or two-thirds of the Legislature.
  • Inflation. The governor’s budget summary includes a lengthy description of inflation that indicates the plan assumes 3.7 percent inflation in 2022. The inflation estimate, like all other provisions of the proposal, could be adjusted in the May revision.
  • Homelessness. The budget includes $9 billion for housing resources and $8 billion for homelessness resources in 2022-23.

The release of the budget proposal marks the official beginning of the state budget process. The governor will present an updated proposal in mid-May, and the Legislature has a June 15 deadline for sending a budget bill to the governor. The governor predicted that his May revision “will look very different” than the budget proposed this week.

An overview of the budget released January 13 by the Legislative Analyst’s Office urged the Legislature to “strongly consider building more reserves” than proposed by Newsom, and “focus on ensuring success of recent initiatives.” The analyst wrote: “We recommend the Legislature dedicate the early part of the budget process to overseeing the implementation of last year’s significant augmentations. This information could inform the Legislature’s approach to allocating this year’s surplus. For instance, if departments face challenges with administrative capacity, the Legislature could consider whether additional staffing is warranted. Moreover, given the scale of last year’s commitments, we suggest the Legislature be cautious in creating additional new programs as well as expanding the scope of existing programs.”