State Budget

State Budget: In New Budget, Governor Proposes $7.4 Billion Increase in Spending

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Governor Gavin Newsom on January 10 unveiled a $222.2 billion state budget proposal, reflecting a $7.4 billion increase in total spending (general fund and special funds) over the budget enacted in June. The governor said the budget has an operating surplus of $5.6 billion.

At a press conference, Newsom touted the “highest level of investment ever” in public education – $84 billion, which represents a 3 percent increase over the current fiscal year, which also represented a record high. The governor’s budget summary added: “Per pupil funding has grown by more than $7,200 since its low point in 2011-12 and achievement gaps are closing for many students.” The governor’s budget summary notes that growth in property tax revenue is fueling school funding increases. “The Proposition 98 [minimum school funding guarantee] funding level for 2020-21 represents an increase of $3 billion over the 2019-20 level funded in the 2019 Budget Act. The Proposition 98 funding levels for the 2018-19 and 2019-20 fiscal years increased from 2019 Budget Act levels by $301.5 million and $517 million, respectively, due largely to an increase in property tax revenue in 2018-19 and increased General Fund revenues in both 2018-19 and 2019-20.”

CalTax President Robert Gutierrez said: “This budget illustrates that economic growth is the best source of new revenue for the state. Economic expansion created major increases in property tax, personal income tax and corporation tax revenue, allowing California to make historic investments in public schools while also establishing record reserves and an operating surplus. As the budget process continues, the Legislature, governor and voters should take great care not to jeopardize this windfall by disrupting the economy.”

Newsom criticized what he termed “California Derangement Syndrome” in the media, and said, “I’m very proud to be a Californian.” While the governor praised the state’s gross domestic product growth averaging 3.8 percent annually over the past five years, he cautioned about “a contraction of our expansion,” adding, “We’re seeing a slowing down of our economic growth.”

The budget proposes a tax increase on “vaping” products – a new tax of $2 for each 40 milligrams of nicotine in the product, effective January 1, 2021. The tax would cost consumers an estimated $32 million per year, and the money would be deposited into a special fund to be used for administration, enforcement, youth prevention, and heath care workforce programs.

The proposed budget for the 2020-21 fiscal year includes:

  • Reserves totaling $21 billion.
  • New spending of $1 billion on programs designed to address homelessness.
  • A forecast that over the next three fiscal years, revenue from the corporation tax will be almost $5 billion higher than projected in last year’s budget.
  • A hazardous waste fee “restructure” that includes a new five-member board within the Department of Toxic Substances Control to set fees through regulations, hear permit appeals and “provide strategic guidance” to the department. “Hazardous waste management fees should distribute the cost of managing hazardous waste and support the polluter pays principle,” the budget summary states. “The proposed language will streamline the existing fee structure, and will provide the board with the ability to set fees through a public process.”
  • Extension of last year’s sales tax exemption on feminine hygiene products and diapers for children, so it would expire in July 2023 instead of December 2021.
  • Eliminating the minimum franchise tax ($800 a year) for small businesses during their first year.
  • Changes to cannabis tax administration to centralize administration in the Department of Cannabis Control.
  • A $4.75 billion general obligation bond for “climate resiliency” for the November ballot.

The budget summary states that in the spring, the administration will propose a plan “to negotiate partnerships to establish the state’s own generic drug label.“ Under the plan, the state would contract with one or more generic drug manufacturers to make certain generic drugs on behalf of the state and participating entities. “This proposal will increase competition in the generic market, resulting in lower generic drug prices for all purchasers,” the budget summary states.

The budget also notes that the highest-income Californians pay a large share of the state’s personal income tax. “For the 2017 tax year, the top 1 percent of income earners paid over 47 percent of personal income taxes …,” the budget summary states. “Consequently, changes in the income of a relatively small group of taxpayers can have a significant impact on state revenues.”

As shown in the chart below, the governor’s January proposal to the Legislature is just the beginning of the process, and the spending totals in the enacted budget typically are much higher. Also, it is common for the Legislature and governor to approve budget augmentations later in the year. Actual spending, however, can vary dramatically from the numbers projected in the budget documents, as much of the state’s spending is dependent on caseloads in state health and welfare programs. In 2018-19, actual spending was $22 billion higher than proposed in January and $11 billion higher than projected in the budget bill that was signed by the governor.