California’s focus: what to do with an expected surplus of at least $6.1 billion. Republicans say return it to California’s 40 million residents as a nice tax refund. The governor’s priority is to fill up the state’s rainy day fund. Democratic legislators mostly want to spend it.
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It should be said that California’s resistance began before there was a resistance.
When Gov. Jerry Brown unveiled his last budget Wednesday, it bookended eight years of a progressive march to reduce greenhouse gases, expand health care, grant more rights to undocumented immigrants and raise the minimum wage to $15 an hour. Along the way, blue state voters have assented by passing temporary taxes on the rich—not once, but twice. The top marginal income tax rate is now 13.3 percent, the highest state income tax rate in the country.
In short, policies that are now labeled acts of resistance to President Donald Trump were alive and ascendant in California long before he won the White House. But the contrasts have become much more stark. Instead of cutting taxes, the Democratic governor and his party’s legislative leaders have passed a gas tax to help pay for aging infrastructure. Instead of trying to shift government out of the healthcare marketplace, California is looking for a way to fund single-payer health care, including coverage for undocumented immigrants. Instead of criminalizing pot, the state is looking forward to collecting taxes on marijuana sales.
In the months between now and the June deadline for a final budget, the governor and the Legislature will hammer out details. The focus this year: what to do with an expected surplus of $6.1 billion. Republicans say return it to California’s 40 million residents as a nice tax refund. The governor’s priority is to fill up the state’s rainy day fund. Democratic legislators mostly want to spend it.
“We have a very different approach,” said Assemblyman Phil Ting, the San Francisco Democrat who chairs the Assembly Budget Committee. “Our focus, the people who we think need tax relief, are the working Californians who are making less than $25,000. That’s where we want to spend our money, making sure they have money to pay rent, to pay for food.”
Rather than giving out “huge corporate tax breaks and a huge tax break for the wealthiest in this country,” Ting has a long list of how he would like to spend that extra money, including:
- Increase the state’s Earned Income Tax Credit, which puts money into the hands of the working poor
- Expand Medi-Cal health care for poorer Californians to cover all remaining uninsured residents, mostly undocumented immigrants
- Expand early education for 4-year-olds through preschool and transitional kindergarten programs
- Increase college aid
- Expand mental and social services to reduce the number of criminals who go on to re-offend
As supportive as Brown might be of these Democratic aspirations, his administration is urging legislative leaders to proceed with caution. The state’s tax structure is more vulnerable than ever to the stock market gains and losses of its wealthiest citizens, and the governor said California must prepare for the next economic downturn because a mild recession could wipe away at least $20 billion a year in revenues.
He also warns of uncertainty from Washington.
“There are certain policies that are radical departures from the norm, and California will fight those, whether it’s immigration or offshore drilling,” Brown said. “We don’t know what will happen. I wouldn’t want to portray a California-Washington battle, although there are some key differences and we’ll espouse our values.”
Since Brown was elected to a second stint as governor in November 2010, the state has climbed out of the recession and enjoyed economic prosperity. The unemployment rate, which topped 12 percent, now stands at 4.6 percent. Since his return, California has added 2.4 million jobs and hourly wages are up $4.76 an hour. The state, which carried a $25 billion deficit in his first year back, has enjoyed billion-dollar surpluses in recent years and the state now has a rainy day fund.
The governor’s proposed $190 billion budget for California is dominated by education (29 percent) and health care (32 percent) spending. Health care spending has been growing particularly fast since the state embraced the Affordable Care Act, best known as Obamacare.
The act not only grew the marketplace for private health plans but allowed states to expand their Medicaid health insurance programs for the poor. Because California is among 30 states that expanded Medicaid, the federal government is paying at least 90 percent of the cost for newly eligible enrollees.
That has allowed California to draw billions in extra funding from the federal government to bolster Medi-Cal, the state’s version of the national Medicaid program. As a result, the number of people without health coverage in the state has dropped to a historic low: from 17.6 percent in the 1980s to 7.6 percent in 2016. Today, one in three Californians are covered by Medi-Cal.
Public schools too have greatly benefited since the recession, with much of the extra spending on schools going to improve teachers’ salaries.
However, if the federal government doesn’t reauthorize the Children’s Health Insurance Program for 1.3 million children, that could add more than $850 million in costs to the state over two years.
Worse, if Republicans in Washington slash Medicaid funding in 2018, the state could lose between $25 billion and $50 billion, said Chris Hoene, executive director of the California Budget & Policy Center, a progressive think tank in Sacramento.
“The reality is California could not afford the scale of the cuts the GOP has been proposing,” Hoene said. “That’s going to put state leaders in a position of deciding who gets state services and how do they fund that.”
Other factors are straining the budget.
For example, pension costs for public workers continue to be one of the fastest-growing liabilities—driven by lower investment rate assumptions, higher health care costs and longer life spans.
Voters, too, could turn on Brown and lawmakers. Early polling suggests Republicans have a decent shot at repealing a gas tax hike that went into effect late last year. Brown said at a press conference Wednesday that he believes a repeal initiative could be defeated.
The Legislature’s nonpartisan budget analyst is urging lawmakers not to commit to too many new spending programs.
“As it crafts the 2018-19 budget and future budgets, we encourage the Legislature to consider all of the uncertainty faced by the budget in future years and continue its recent practice of building its reserve levels,” the analyst wrote.
On the flipside, Republicans are calling for a tax refund, if not an outright repeal of state income taxes. They argue that California’s high taxes chase residents out of state.
“This surplus is a direct result of Capitol Democrats overtaxing hard-working Californians,” said Assemblyman Matthew Harper, R-Huntington Beach. “Rather than expanding an ever-growing list of government programs, our leaders should figure out a way to return that money to the people who earned it in the first place.”
Assemblyman Vince Fong, R-Bakersfield, said he plans to introduce tax cuts aimed at helping families and small businesses stay in California.
“As we see all too often now, we are losing families and small businesses to neighboring states that have tax burdens much lower than California’s high-priced tax code,” Fong said on Twitter. “We have an opportunity to change that.”
Brown dismissed the refund idea, saying it would only prompt service cuts to public schools and universities later. “If you want to budget responsibly, you need big surpluses in years that are good,” he said.
Still, there’s a growing sentiment that California may have to respond to recent changes in the federal tax plan, specifically to a $10,000 cap on state and local deductions that will hit millions of households.
According to the state Finance Department, the average deduction for state and local income taxes alone is nearly $16,000 per return, while state and local property taxes average less than $6,000 per return. Because a portion of those taxes will no longer be deductible, it acts as double taxation for California taxpayers.
Senate President Pro Tem Kevin de León, who is running for U.S. Senate, introduced legislation Thursday to shield Californians from bearing the costs of the tax overhaul. The bill, dubbed Protect California Taxpayers Act, would allow taxpayers to make charitable deductions to the state and receive a dollar-for-dollar tax credit on the full amount of their contribution. By having residents donate to the state government as a charitable contribution, the contribution remains deductible on federal taxes.
“The Republican tax plan gives corporations and hedge-fund managers a trillion-dollar tax cut and expects California taxpayers to foot the bill,” de León said in announcing his legislation. “We won’t allow California residents to be the casualty of this disastrous tax scheme.”
Brown was particularly vocal against the GOP tax proposal, calling it a “tax monstrosity,” but he expressed reservations about whether the state could sidestep federal law.
“It looks interesting,” Brown said. “But two questions: Can it work? If it does work, can the Internal Revenue Service issue a regulation and completely subvert it?”
De Leon responded that he was confident it would work because similar charitable deductions have already been given out for education-based contributions.
For now, state Democrats are in agreement about a common threat.
Whether it’s federal tax changes or entitlement cuts, the leader of the Assembly, Anthony Rendon, D-Paramount, said he’s most concerned Republicans in Congress and the Trump administration will take another swipe at liberal California in 2018. “We’re worried about the next shoe to drop.”