State Budget

Tax Increases Off the Table in Budget Negotiations, Newsom Says

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Governor Gavin Newsom this morning released his revised state budget and said tax increases will not be included in the new budget.

“How do you raise taxes when you’re enjoying a $177 billion operating surplus in the last 24 months and you just sent $18.1 billion in tax rebates, and look people in the eye?” Newsom said. “I don’t think it’s the right time and I don’t think it’s the right thing to do at this moment.”

Asked about the Senate Democrats’ proposed changes that would limit businesses’ ability to use net operating losses, Newsom said he opposes those changes, as well.

“We just re-established it,” Newsom said, referring to the NOL deduction. “It helped us get back an R&D facility for Tesla in California. We dominate in R&D – I want to maintain that domination. I don’t support the proposal.”

“We commend the governor for rejecting calls for broad-based tax increases,” CalTax President Robert Gutierrez said. “California’s tax structure depends on a thriving economy with high-wage jobs. Calls to raise taxes only hinder California’s ability to compete in the global economy.”

The revised budget proposes $306.5 billion in total spending (up from $297 billion in his January budget but slightly less than the $307.9 billion in the budget enacted last summer) and projects a $31.5 billion deficit (up from $22.5 billion projected in January).

The operating deficit represents the gap between projected revenue and spending if no changes were made.

The governor said his proposed budget is balanced, continuing the January’s budget’s plan to bridge $22.5 billion of the deficit with $7.4 billion in funding delays, $5.7 billion in reductions, $4.3 billion in fund shifts, $3.9 billion in triggered reductions, $1.2 billion in borrowing and new revenue, and an unspecified amount of “good government/efficiencies.”

The remaining $9.3 billion deficit would be bridged with $3.7 billion in borrowing and new revenue; $3.3 billion in fund shifts; $1.1 billion in pulling back unspent funds and reducing previously approved one-time spending; $695 million in funding delays; and $450 million in withdrawals from the safety net reserve (leaving $450 million in the reserve).

The $450 million withdrawal from the safety net reserve is the only use of reserve funds, Newsom said. Under his proposal, total state reserves are projected to increase to $37.2 billion, up from $35.6 billion in the January estimate.

“We need to maintain our prudence,” Newsom said during a press conference in Sacramento, attended by many administration staff members who applauded several times during his presentation. Tapping into the large rainy day fund is not an option, Newsom said, because the fund will be needed if the state enters a recession.

The governor said the federal debt ceiling impasse causes uncertainty for the state.

The state’s extended tax filing deadline also creates uncertainty, Newsom noted. The deadline was extended to October 16 to provide relief to Californians affected by the winter storms, so the traditional influx of PIT revenue in April was much lower than usual, and the expected surge in October will occur after the 2023-24 budget has been enacted. Newsom predicted that $42 billion in delayed tax receipts will be collected in October, with approximately $28.4 billion of that total coming from the personal income tax.

The governor highlighted the volatility of capital gains – and thus the state’s personal income tax revenue – at the beginning of his press conference.

The revised budget estimates total revenue of $282 billion from all funds in 2023-24, up from the January budget estimate of $276 billion.

The Legislature’s deadline for sending a budget bill to the governor is June 15. The courts have ruled that this bill does not have to comprise a complete budget, so budget “trailer bills” often are approved after the deadline.