2008 Essay #11: the Budget amends that got the budget signed

This is my eleventh essay for 2008. In this essay, I set out the provisions of the two amendments taken to the budget bills on Friday, September 19 through two quick votes in both houses, and opine about the results.

Visit my website at www.sen.ca.gov/kuehl to read my previous essays. For those of you who received this essay by forwarding, it is written by California State Senator Sheila Kuehl. If you wish to subscribe to receive these essays on a continuing basis, (no charge), please send an e-mail to Sheila.Kuehl@sen.ca.gov, titled "subscribe." If you receive it directly and wish you didn't....send an e-mail to the same address, but title it "subscribe."

General Description of Budget Bills before these changes

As a refresher: Four main bills were presented on the evening of Monday September 15, which, together, constituted the budget and changes to the ways in which revenues would be realized to balance the budget.

The first budget bill presented was the Conference Committee report (for a description, see my essay #6 for 2008, on my website).

The second budget bill, an addendum to the Conference Report, included additional funds for various programs. (for a more complete description, see my Essay #10).

There were two revenue bills. One of them required a 2/3 vote, and remained unchanged in the Friday final vote. It was a controversial bill that drew the critique of most tax reform advocates on both sides of most questions and the unfettered wrath of the State Treasurer, Bill Lockyer. It deleted earlier provisions that would have increased the sales tax, pursuant to the Governor's proposed budget, and, in the provision that drew the most complaint, added net operating loss (NOL) "carry-back" provisions to allow corporations to use their net operating losses to offset gains. In order to help the 2008-09 and 2009-10 budgets the ability to take these losses would be suspended for two years. However, after those two years, companies could take carryback losses from all those years, and could spread them out against gains made in any of their subsidiaries and affiliated corporations, probably blowing another big hole in the budget in three years. The provisions described above were also limited to 50% of losses in 2011, 75% in 2012 and 100% thereafter.

Virtually everyone sees this as a great expansion of the use of these losses to offset revenue in that it allows the losses to be used by affiliated corporations against their income.

The first revenue bill also accelerated payments of fees by Limited Liability Companies to June 15 of the current taxable year, instead of April 15 of the next year, as is now the case with local business license taxes and personal income taxes, with a 10% penalty for late or underpayment. It limited the amount of business incentive tax credits that could be used to reduce tax liability.

This bill remained unchanged in the amendments adopted in the last floor session on Friday, September 19.

The Bill Not Taken

The second revenue bill adopted on Monday September 15 was the source of even more controversy, and drew the Governor's veto threat. The bill required only a majority vote because it simply increased the amount of withholding collected by the Franchise Tax Board, but did not increase taxes in any way. Specifically, after 2009, the bill would have required the wage withholding tables to produce a sum equal to 10% more than is now specified for withholding. It also increased the withholding rates to 6.6% for supplemental wages and 10.23% for stock options and bonus payments.

Critics from both sides of the economic advocacy spectrum quickly lined up in unprecedented unanimity against this plan, indicating that this change would be tantamount to "borrowing" from the taxpayers who didn't actually owe such an increased amount and who would simply get it back when they filed their taxes.

In addition, this bill would have eliminated the "safe harbor" provision for taxpayers with incomes over one million dollars by requiring them to pay their full estimated tax liability in quarterly payments, instead of the smaller increments now allowed. This bill received no Republican votes and got a bare majority in the Senate. I believe the same was true in the Assembly, which voted on the bill later in the morning of September 16.

Instead of the above: Penalties to Balance the Budget

On Friday, the bill outlined above was officially dead, as the Governor would not sign it. Instead, a new majority vote bill made four changes to earlier provisions regarding revenue.

First, it accelerated estimated quarterly payments by corporate taxpayers that owe more than $80,000 per year in taxes. They will now have to pay 30% or their liability in April and June and 20% in September and December.

Second, it eliminated the so-called "safe harbor" for taxpayers with incomes over $1 million and requires them to make their quarterly payments based on their current income. Prior to this, they could rely on their prior year's earnings to estimate their tax and many who increased their earnings held back tax payments for a whole year. This is another kind of acceleration for taxes owed.

Third, the bill established a penalty of 20% of understated tax if the understated tax estimates are more than $1 million, unless the understatement was because of a new law or bad advice by the Franchise Tax Board.

Fourth, it adopted an accrual device to bring more revenue into the 2008-09 budget, such that 60% of the balance of the changes of corporation income and franchise tax payments are accrued to the 2007-08 year and the balance of corporation and franchise tax payments and all changes in personal income tax payments are accrued to the 2008-09 fiscal year.

Changes In The Rainy Day Fund

The main problem the Governor had with the bills passed on Monday September 15 were the provisions of Senate Constitutional Amendment (SCA) 13, and threatened to veto the budget because of this bill. Consequently, on Friday, September 19, the Legislature passed SCA 30, revising the provisions of SCA 13. The Governor then signs SCA 13 and then SCA 30 so that the provisions he didn't want changed would go into effect and the revisions contained in the latter bill would be put out to the voters for ratification.

First, SCA 13 would have increased the size of the Budget Stabilization Fund (BSF) from 5% to 12.5 percent (see my essay #8, on my website) and provided that the Governor could only suspend the automatic transfer of funds from the General Fund to the BSF in years in which available resources are less than prior year's expenditures.

The new bill further restricted the Governor's ability to suspend the automatic transfer by also requiring that the Legislature pass a statute authorizing a transfer from the Budget Stabilization Fund back into the General Fund. It also restricts any withdrawals from the BSF only to "bad revenue years." Specifically, revenues, transfers, and prior-year balances must be below that required to meet prior-year expenditures adjusted for population and cost of living, only.

Finally, BSF funds may be used for emergencies, but the definition was limited and did not include fiscal emergencies.

The Three Lottery Bills passed earlier
Remained the same (see my previous essay)

The budget nobody loved

It would not be an exaggeration to say that nobody loved this budget. The Governor, for the first time in his media-loving history, did not have a signing event. Even the fact that the people surrounding him when he signed the budget were smiling drew snarling responses in the blogasphere. It gave an amazing additional tax break to corporations. It preserved payments for the poorest in the state but somewhat limited their ability to access them. It made giant unsustainable assumptions about revenue. It required automatic savings without much ability to access them when the state needs them. And, most importantly, it did nothing to help any future budget.

In the next few essays, I?ll set out the contents of the trailer bills, which usually have the most information about what is actually being funded. I will also report on the Governor?s "line item vetoes" through which he further changes, with a blue pencil, the budget passed by the Legislature.