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Commentary: Budget blueprint may be a gravy train to a fiscal cliff

Issue Date: June 8, 2022
By Taylor Roschen
Taylor Roschen
A podium is prepared for Gov. Gavin Newson’s May 13 budget revision presentation. California has a $97.5 billion budget surplus, but the legislative analyst said a recession could make it disappear.
Photo/California Governor’s Office

This month, Gov. Gavin Newsom released the "California Blueprint." Also known as the "May Revise," it updates his January budget proposal based on revenues and new policy initiatives. At a time when most Californians are struggling to make ends meet, the ironies abound.

The state now boasts a $300.7 billion budget and a $97.5 billion surplus.

Based on reports from the Department of Finance, this surplus is the happy accident of unprecedented revenue growth over the last two years—namely a 20% to 30% increase in revenue from the state's largest taxes (personal income, corporation and sales tax). Rising stocks, consumer spending and corporate earnings have also pumped more money into California's coffers.

But the gravy train won't run forever, the Legislative Analyst's Office warns. In a recent report issued by the LAO, economic indicators—including tight labor markets, rising inflation, slowing home sales and declining consumer confidence—suggest a recession may be on the horizon. Based on spending versus savings, California could veer from a surplus to a budget deficit. But more on that later.

So back to the budget, what is in "the Blueprint?" Well, plenty. Between the January and May proposals, in some instances, it's simply a matter of adding a few more zeros on the end. As expected, the budget includes all of the governor's campaign promises—for housing, climate change, public education, zero-emission vehicles and health care expansion.

Newsom's proposal also focuses quite a bit on agriculture. Highlights of note include $2 billion in drought relief. This includes $60 million for on-farm irrigation efficiency; $25 million for direct relief for small farms; $40 million for agricultural land repurposing; and $75 million for the California Small Agricultural Business Drought Relief Grant Program, which provides grants of up to $50,000 for ag-related business in regions hardest hit by drought.

California farmers will also be eligible to compete for $2.7 billion in another round of the Small Business COVID Relief Grants.

The Blueprint maps out $75 million for California State University farms, $100 million for methane-monitoring satellites, and hundreds of millions for "nature-based solutions," including grazing, healthy soils, wetland restoration and composting. Additional funds go to broadband, energy reliability and wildfire prevention.

Beyond seeking favor with a broad swath of Californians, Newsom has another audience to please—the Legislature. Even with a two-thirds Democratic majority, with elections looming, leadership fights heating up and most moderate members—and voters—frustrated, the last round of budget negotiations could prove divisive.

Parties disagree on how to offer gas tax relief. There are disagreements on how best to "dole out" the cash—funds for car owners or based on income levels—while others want a pause or repeal of the gas tax. Climate and drought relief talks may be less about how much to spend, but rather over who gets money and for what. And community issues such as homelessness, public safety and mental illness are rarely met with consensus.

Regardless, we're now at the point of negotiations, when the veil is drawn and the "Big Three"—leaders of the Senate, Assembly and the administration—hammer out the final details.

However, there's still one item that few seem to want to address—the State Appropriations Limit, also known as the Gann Limit. It was approved by voters in 1979 via Proposition 4, which requires per person government spending, when adjusted for inflation, stay under 1978 levels.

If the state wants to spend more than that limit, based on Proposition 4, it generally has two options: It can issue refunds to taxpayers or allocate excess revenues to schools. What novel concepts.

But, practically speaking, asking the state to give money back is a lot like getting water from a rock. So other, less restricting options exist. The Legislature can spend more money on items excluded from the limit, such as offerings to local government, debt, capital projects or emergencies. It can reduce taxes—an unlikely path—or put more back into the state's savings accounts.

While spending under the limit is not a problem in most years, this year and beyond will bring a new paradigm. The additional revenue from personal income tax and capital gains has pushed the budget up against this limit, and decisions to adopt tax increases over time have diminished any wiggle room.

Then there's the risk of a recession. The LAO emphatically says "the state cannot 'grow its way' out of a budget problem." It also warns, "The state has a $52 billion surplus—now is the time to prepare for these looming budget problems."

Or we could do nothing and plod along as if a recession and the related fiscal cliff aren't ahead of us. While debates will continue, one thing the governor said during his budget press conference resonates. "We're as dumb," Newsom said, "as we want to be."

(Taylor Roschen is a policy advocate for the California Farm Bureau Federation. She may be contacted at troschen@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.




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