Both houses of the Legislature passed a budget late yesterday (possibly early this morning). The $110 billion budget does not include any new general taxes or tax increases (no increase in the sales tax or income tax).
The budget does include some new gimmicks, though. There’s borrowing from the state lottery, and a change in how state taxes are collected. The Los Angeles Times reports:
Some businesses and individuals would have to pay their taxes sooner, and some would have to pay more than they owe and would get the extra back later. State taxes withheld at the workplace would jump 10% for everyone.
Here are the tax changes being made:
– Estimated payments will be “front-loaded” (more must be paid earlier in the year);
– Estimated tax payments would be based only on 90% of current years’ income (66% for farmers) and on the annualized income method (aka “pay as you go”);
– LLCs must prepay the LLC fee rather than paying it the following April;
– There will be a new tax amnesty;
– The Net Operating Loss (NOL) carryforward and Research & Development credits would be temporarily suspended; and
– Beginning in 2010 businesses would be able to stockpile credits and use them (in future years) more liberally.
The devil is in the details, and I haven’t seen them yet. I probably won’t until next week, but when I do I’ll report on them.
There is one other detail: Governor Schwarzenegger is threatening a veto. The budget establishes a rainy day fund, but it’s weak in concept. The Governator wants a far stronger rainy day fund where transfers out are rare.
Additionally, the rainy day fund and the borrowing from the state lottery require voter approval. That can’t happen in November (the budget passed too late) so we’ll likely have another special election next year.
There are major problems with this budget:
1. What happens with the 2009-2010 budget? California’s economy likely won’t improve for another two years. The budget deficit next year figures to be worse than this year. Additionally, the money that made this budget “balanced” came from the following year’s budget.
2. This budget makes California even less of a business-friendly state. This will cause even more businesses to leave the Bronze Golden State resulting in lowered tax revenues.
3. How rosy are the assumptions in this budget? I can’t tell, but I suspect they’re very rosy. I suspect that next March we’ll be talking about a $5 billion budget deficit in the current fiscal year.
Sooner or later California will have to tackle these budget issues head-on. As usual, later appears to have won for now. Eventually, though, real solutions must be found or the train jumps the tracks.