Taxable Talk

Reports out of Sacramento are that the Big Five (Governor Schwarzenegger and the Republican and Democratic leaders of the Legislature) have reached another budget deal; this deal will include all of Governor Schwarzenegger's budget fixes.

I can't find anything on specifics, so you will probably see these before I will (I'm in Connecticut and it's likely I'll be unable to post again until Tuesday). So we'll see if there's yet another budget done with smoke and mirrors or real reform in Sacramento.

This morning from the Wall Street Journal I learned that Governor Schwarzenegger has delayed his veto of the budget until Friday. It's likely there are the votes needed to override the veto; the Governator promised that if that happened he'd veto just about everything else that crossed his desk.

Republican State Senator Richard Ackerman is quoted in the Journal noting that the Governor could veto the associated spending and tax bills as there aren't enough votes for most of those to survive a veto. So confusion reigns in Sacramento, and I'm guessing I'll find out more this weekend.

It's now worthy of a soap opera. Republican Governor Arnold Schwarzenegger announced this afternoon that he would veto the budget bill that passed last night. He announced that if the budget veto is overridden that he would veto "hundreds of bills."

The Flash Report is a bit less certain of what the Governator will do. I do know that California has a dysfunctional budget process and that there wasn't real structural reform this year. I don't know how the Governor can mandate 60% of the Legislature to change their world-views. I suspect we're still seeing the unstoppable force meeting the immovable object.

I'll be out of town over the next few days, but I'll try to update the latest chapters of "As The Budget Churns."

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.

There's still no budget in California. However, the Los Angeles Times reported that Senate President Don Perata (D-Oakland) sent an email to fellow Democratic Senators that he would attempt to work with Republicans to write a new budget that has no new taxes and no borrowing. We shall see if there's a real budget or one full of gimmicks and if it actually passes this week.

Meanwhile, the Wall Street Journal noted in an editorial that California and New York, the states with the highest tax rates, are losing taxpayers. The Journal speculates that individuals who pay a lot of tax and can move do so. I don't have to speculate about that—I know the Journal is correct. I've had corporate clients relocate from Southern California to low-tax states and their businesses suddenly became profitable.

The Laffer Curve dictates that decreasing tax rates can lead to increased tax collections. It also leads to businesses making more money which can lead to increased employment and a better economy. Do you think the politicians in Sacramento will realize this? I doubt it....