Will the coronavirus pandemic lead to tax increases?
In January, Gov. Gavin Newsom presented a proposed budget for fiscal year 2020-2021 which envisioned a several billion dollar increase in spending for existing programs as well as a host of new programs. But that was before COVID-19 arrived at our shores.
In over the course of just three weeks in March, it became obvious that the original budget plan would have to be scrapped because of the most rapid economic downturn America has ever seen.
So it was with great interest that all those who follow California politics were watching last Thursday as Newsom released the “May RevisionRevise” of the budget. To no one’s surprise, the huge dive in state revenues forced the governor to slash $19 billion from January’s initial plan.
According to the governor’s Department of Finance, the budget deficit is $54 billion. But this figure may be overstated in order to present to the public the worst possible case. The non-partisan Legislative Analyst projected the deficit to be as low as $18 billion with a worst case scenario of $31 billion.
The question is whether the budget shortfall will lead to a demand for tax increases. Taxpayers can also take some comfort that there are no immediate plans for broad-based tax increases. The governor proposed two tax hikes, a suspension of a business deduction for what are known as “net operating losses” and a tax on vaping products.
It was a positive sign that Newsom also acknowledged that spending cuts have to be a part of the solution. Saying that Californians deserve a leaner government, reductions in overhead expenses such as government cars and travel, and reform to agencies including the Department of Motor Vehicles. He also proposed a 10 percent “contribution” from state workers in the form of salary reductions.
However, what appeared to be a glimmer of hope for taxpayers may be swallowed up by the serious flaws in Newsom’s revised budget, the biggest of which is the belief that the proposal by Speaker Nancy Pelosi reflecting a $3 trillion recovery package will provide California with nearly as much money as it wants. The state budget should reflect reality. Pelosi’s bill will face a buzz saw in the U.S. Senate. That is not to say that no additional money for state and local governments will be forthcoming from Congress, but there is little chance it will be on the scale that represents a significant percentage of California’s shortfall.
For that reason, the governor and the Legislature must be prepared to make even more substantial reductions in state spending. A return to previous spending levels may be necessary. The fact is, California’s budget has grown much faster than population and inflation in the last decade.
The fastest way to close the shortfall would be with a rapid recovery in the California economy. Broad-based regulatory reform, delaying the minimum wage increase and tort reform could go far to incentivize the private sector.
On the other hand, nothing would encumber economic recovery more than tax hikes. Regrettably, Newsom didn’t rule out more tax increases, and even more troubling was his evasive answer when asked about the “split roll” property tax hike slated for the November ballot. This attack on Proposition 13 would provide yet another incentive for businesses to pick up stakes and move to other states.
The “May Revise” is, in reality, just the second round of what may be at least a 10-round fight among politicians, interest groups and citizen taxpayers. But given that the June deadline for passage of the final budget is immutable, it won’t be just the weather that gets hot in California over the next several weeks.
Jon Coupal is president of the Howard Jarvis Taxpayers Association.