Budget Update - Doubts Arise About Governor's Proposed Budget

Governor Jerry Brown released a $92.6 billion general fund budget last week that includes health and welfare cuts while relying on voters to pass a $6.9 billion increase of income taxes on the wealthy and a half cent sales tax increase.  He also outlined an alternative path if the taxes fail that would reduce school program funding by $2.4 billion, about 5 percent.

Now that analysts and politicos alike have had some time to digest all the facts and numbers, questions are arising relative to the validity of the underlying assumptions.  One of the criticisms comes from the state’s top budget analyst, Mac Taylor with the Legislative Analyst’s Office (LAO).  In a press conference this week, Taylor emphasized the wide divide between his tax projections and Brown's.  Looking back to 2010-11, Brown is more optimistic by incorporating $3.9 billion of additional revenue into his budget balancing projections.  If that gap holds, Taylor warned that lawmakers and the Governor will have to find more revenues or cuts to balance the budget.

Taylor and the Governor’s main point of contention is over how much Californians will receive in capital gains.  The Department of Finance predicts taxpayers will reap $96 billion in income from capital gains in 2012, while the LAO estimates that the number will be closer to $62 billion -- a $34 billion difference or a $3 billion tax revenue swing.

The Governor responded by saying that the report backed up his call for tough measures to close the deficit.  Brown is asking the Legislature to make $4.2 billion in immediate cuts -- many to social programs that serve low-income residents.  The cuts would take effect whether or not voters pass Brown's tax measure, which would temporarily raise sales taxes by a half-percent and increase income taxes on individuals who make $250,000 a year or more.  However, Democratic leaders have balked at quick action, saying they want to see how the economy is doing in May before making potentially unnecessary cuts.  For his part, Taylor, is urging the Legislature to wait at least a couple of weeks before moving ahead with budget action to measure the strength of the first estimated payments taxpayers will be making by the end of the month.  The LAO will provide an estimate of revenues in February, followed by another administration estimate in May.

Stay tuned…