Newly-elected Gov. Jerry Brown released his proposed budget which extends previous tax increases and makes $12.5 billion in cuts to state programs to close the $25.4 billion state deficit over the next 18 months. Gov. Brown would like the Legislature to approve his spending cuts prior to a special election on extending tax increases. This proposed special election could happen as soon as June. The full state budget would be passed after this special election. The non-partisan Legislative Analysts Office has reviewed this proposal and reports it is a very good starting point. The plan does not use the budget gimmicks of the past several years which dug the state into its current hole of over-projecting revenue and borrowing from Program A to pay for Program B.
Among the many cuts proposed, Gov. Brown includes limiting Medi-Cal services to six prescriptions per month (excluding life saving medications), ten doctor visits per year, and setting a $5 co pay for services. Other cuts include Cal Works, welfare-to-work, and cuts to the CSU and UC.
Tax extensions in the special election include the one percent sales tax increase and the ½ percent vehicle license fee increase. These two extensions are expected to raise $5.9 billion. Brown is also asking voters to continue the ¼ percent income tax increase. These are the current tax rates California residents are paying, which were set to expire at the end of June. The increases were approved in a 2009 budget deal.
Much is still unknown about the vote count needed to pass a proposed budget. In the November 2010 election, voters passed Proposition 25, requiring only a simple majority of legislators to approve a state budget rather than the previously required two-thirds supermajority. Some of the reductions Gov. Brown has proposed, including cuts to welfare and higher education, may still require a two-thirds vote despite Prop. 25, which states that laws can be changed by a majority vote only after a complete budget plan is approved. But as proposed, the budget is passed after the changes in law are made. These details of Prop. 25 and the proposed budget are still being sorted out, and it may take several months to get a final decision.
Gov. Brown’s proposed budget as of this writing does not have a negative impact on REALTORS® or private property rights. There are no fees for monument preservation recording, or any number of other things that have been proposed in past years. There is also no proposal to change the mortgage interest deduction. While this is normally considered a federal issue, the State has to comply with federal tax code for the deduction to stand in California and it wound up on the state’s chopping block a number of years ago. This budget also does not propose independent contractor withholding, which C.A.R. defeated twice in the Legislature and once with a governor’s veto last year. Finally, the proposed budget does not contain service taxes.
Service taxes, theoretically would reduce the sales tax on goods but expand taxes on all services. This would have far reaching impacts on all residents, who generally don’t read the info on PAN cards but especially the real estate industry. Agent representation, home inspections, home repairs, title and escrow could all be considered services under such a proposal (along with haircuts, legal services, and taking your pets to the vet). If voters do not pass the proposed tax rate extensions, Gov. Brown will have to fill in this gap. Any of these items may interest his administration for revenue generation.
These budget cuts and tax rate extensions will be hard as Gov. Brown was the first to admit. But California needs to find a way to pull itself out of the ever-perpetuating and growing budget deficit. Despite this fact, passing the budget as proposed is far from a guarantee. Democrats will be unhappy with the cuts to social services and limits in service to Medi-Cal patients. Republicans have come out against putting something on the ballot to extend the tax increases. As the budget process continues to unfold we will keep you updated.