Your Guide to the Requirements for Approving Key Legislative Actions in California

June 4, 2014

Each year, state lawmakers grapple with an array of major public policy issues that are subject to varying requirements for approval. This year, for example, lawmakers are considering whether to extend a tax break for companies that make movies or television series in California, a proposal that needs only a simple majority vote of the Legislature and the Governor’s signature to take effect. In contrast, current proposals to sell general obligation (GO) bonds to finance new dams require a two-thirds vote of the Legislature, the Governor’s signature, and voter approval.

For the most part, the rules for approving legislative actions are set forth in California’s lengthy and complex state Constitution. In an effort to help Californians navigate these rules, we’ve put together a simple, easy-to-read table that illustrates the key steps for approving 18 legislative actions, from passing the budget to amending the Constitution itself. This guide shows that more than half of these actions require a two-thirds vote of the Legislature, most require the Governor’s signature, and a few need the consent of the voters.

— Scott Graves



New CBP Brief: Who Pays Taxes in California?

April 11, 2014

A new brief from the California Budget Project — released in advance of Tax Day — reports that California’s lowest-income households on average pay a greater share of their income in state and local taxes than other households. This is even after accounting for the temporary tax increases of Proposition 30 — approved in 2012 — which largely targeted very-high-income Californians.

Using data provided by the Institute on Taxation and Economic Policy (ITEP)Who Pays Taxes in California? shows that nonelderly households in the state’s bottom fifth in terms of income, who earn $13,000 a year on average, pay 10.6 percent of their incomes in state and local taxes. This is a larger share than all other segments of households — including the very wealthy. The top 1 percent of Californians, with an average annual income of $1.6 million, pay just 8.8 percent of their incomes in state and local taxes — or nearly two full percentage points less than the state’s poorest families.

140410_TaxDay

Who Pays Taxes in California? examines how different components of California’s tax system — such as property taxes, sales taxes, and the personal income tax — affect lower- and higher-income Californians. The brief also suggests options for making California’s tax system fairer and promoting economic security for low-income families.

And also: if you’re looking for a comprehensive overview of California’s tax system, be sure to check out the CBP’s Principles and Policy: A
Guide to California’s Tax System.

— Steven Bliss


Recent Lessons in Tax Policy From California and Kansas

March 31, 2014

In 2012, as states across the country continued to cope with the aftershocks of the Great Recession, California and Kansas pursued markedly different paths in tax policy.

In Kansas, the state legislature in May 2012 passed — and Governor Brownback signed into law — a package of large tax cuts, including dropping the top income tax rate by approximately one-fourth and eliminating income taxes entirely on business profits that are “passed through” from businesses to their owners. In addition, the Kansas tax package raised the standard deduction and eliminated a number of tax credits that benefit low-income individuals and families.

In contrast, California voters in November 2012 approved Proposition 30, increasing personal income tax rates on very-high-income Californians for seven years and raising the state’s sales tax rate by one-quarter cent for four years.

The divergent paths pursued in California and Kansas provide an opportunity to compare state approaches to tax policy and the impacts of those policies on households, public systems and services, and economic performance.

According to a new report from the Center on Budget and Policy Priorities (CBPP), the tax cuts enacted in Kansas “were among the largest ever enacted by any state” in percentage terms. The evidence from Kansas so far:

  • Large revenue losses: Kansas has seen an 8 percent decrease in revenues used to fund schools, health care, and other public services, with the revenue loss projected to rise to 16 percent over the next five years.
  • Continuing cuts to schools: While most states are attempting to restore funding for schools after years of cuts, Kansas is proposing still more cuts. The Governor recently proposed another reduction in per-pupil general school aid for the next fiscal year that would leave funding 17 percent below pre-recession levels.
  • Little evidence of improving economic performance: Since the tax cuts, Kansas has added jobs at a pace slower than the country as a whole.

California’s experience since the passage of Proposition 30 in 2012 stands in stark contrast to the recent story Kansas. The evidence from California so far:

  • Large revenue gains: The state’s General Fund revenues increased from $85.6 billion in 2011-12 to an estimated $99.8 billion in 2013-14, and are projected to grow to $106.9 billion in Governor Brown’s proposed 2014-15 budget, an increase of nearly one-quarter (22.6 percent) since 2011-12.
  • Increased funding for schools: The Governor’s 2014-15 spending proposal assumes a total funding level of $61.6 billion for schools and community colleges in 2014-15, nearly one-third (30.6 percent) more than in 2011-12.
  • Improving economic performance: Since 2012, job growth in California has outpaced that of the US as a whole.

To be clear, higher state revenues in California are a product of Proposition 30 and a recovering economy, just as slower economic growth in Kansas contributes, along with tax cuts, to lower state revenues. The linkages between tax policy changes and economic performance are, in general, weak. As the CBPP study reports, “states that cut taxes in the 1990s performed worse, on average, over the course of the next economic cycle than states that were more fiscally prudent. And the academic literature overwhelmingly finds that states with lower personal income taxes perform no better economically than their peers.” Recent experiences in California and Kansas support this evidence — increasing taxes in California did not curb economic growth, while decreasing taxes in Kansas did not boost economic growth.

What is clear, however, is that large tax cuts in Kansas — most of which went to high-income households — have significantly reduced state revenues and resulted in cuts to the state’s schools and other public systems and services, while promises of economic improvement have failed to materialize. Meanwhile, in California, the revenues provided by Proposition 30 have provided the state with the fiscal policy space to boost school funding, pay down debts and liabilities, and begin to reinvest in other public structures and supports as the state’s economy recovers.

— Chris Hoene


Full Implementation of the LCFF Could Bring California’s Per Pupil Spending Closer to the Rest of the US

August 5, 2013

Last week the Legislative Analyst’s Office (LAO) published an overview of the Local Control Funding Formula (LCFF), the fundamental restructuring of California’s K-12 education finance system. The report discusses the LCFF, details how it will provide additional dollars to disadvantaged students, and estimates how much it will cost to implement. In addition to establishing equity as a key principle for how the state funds schools, the LCFF sets a funding goal that could boost California’s per pupil spending closer — if not equal — to that of the rest of the US once the formula is fully implemented.

California should aspire to a better per student spending ranking than the bottom 10, where the state has ranked for the past several years. As we’ve blogged about, California spends $2,500 less per student than the rest of the nation. To reach the same level of per student spending as the rest of the US, California would have needed to spend $15.3 billion more in 2012-13 than it did. While such a boost in funding might seem out of reach, it is actually a smaller increase than what the LAO estimates is needed to fully implement the LCFF. Specifically, for the LCFF to be fully implemented by 2020-21 — the goal established by the Governor and the Legislature — the LAO estimates that school funding would need to reach a level that is equal to an $18 billion increase in 2013-14 (above 2012-13 funding), not accounting for required cost-of-living adjustments. So even though the LCFF is not expected to be fully implemented for several years, policymakers should be commended for establishing a goal that calls for substantially increased state support for schools and could bring state spending per student closer to the level of the rest of the nation.

Reaching this goal, however, depends on a serious long-term approach to increasing state revenue. For instance, such an approach would need to account for the fact that the tax increases from Proposition 30 will expire in 2018. And in a broader sense, a plan for significantly increasing revenues could be part of an ambitious, long-range vision for California. Whether the state will have sufficient revenues to fully implement the LCFF by 2020-21 is unclear. What is clear is that delaying LCFF implementation would perpetuate both California’s low ranking relative to other states and current funding inequities.

— Jonathan Kaplan


Enterprise Zone Reform — At Last

July 29, 2013

Earlier this month, Governor Brown signed into law several bills included in the 2013-14 budget agreement that, at long last, reform the state’s controversial Enterprise Zone (EZ) Program. The program was created nearly 30 years ago with admirable intentions — to provide tax breaks to promote job creation in economically distressed areas. However, independent studies, including our own, have questioned the effectiveness of EZ tax breaks in achieving their goals — even as program costs skyrocketed. Among the problems highlighted in our most recent report:

  • The annual cost of the EZ tax credits and deductions had grown to $700 million and — without program changes — were expected to reach $1 billion in 2016;
  • The EZ program’s tax breaks primarily benefited very large corporations, with two-thirds of the credits being claimed by corporations with assets of at least $1 billion; and,
  • The hiring tax credits, which comprised nearly 60 percent of the total cost of the EZ program, were poorly structured, allowing companies to claim the credits without actually creating new jobs.

Since its inception, the California Budget Project has critiqued the structure, usage, and rising costs of the EZ program. We’ve consistently called for significant reforms to the program, including narrowing the hiring tax credits and zone designations to better ensure that the credits result in new job creation in economically distressed areas. Reform was a long time in coming, despite a body of evidence showing that the program failed to produce its intended outcomes at an increasingly high cost to the state.

The 2013-14 budget agreement puts in place a series of reforms that effectively phase out the EZ program and replace it with a new and revised package of incentives (see our prior blog for more on the specifics of the budget agreement). In brief, the budget agreement:

  • Modifies the current EZ designations to include the use of the credits in census tracts throughout the state that rank in the top 25 percent in both unemployment and poverty;
  • Alters key elements of the hiring tax credit, including requiring businesses to create new jobs (as opposed to hiring new workers for existing positions) and narrowing the hiring tax credit to fewer categories of disadvantaged workers; and,
  • Creates a manufacturing equipment sales and use tax exemption for use within manufacturing and biotech industries. The exemption is available statewide, rather than just within certain geographic areas, helping reduce incentives for jurisdictions in California to compete against each other for businesses.

The budget agreement also includes a number of provisions designed to enhance our ability to evaluate the performance of the credits. The new policy requires businesses to return money to the state if certain terms are not met, sets benchmarks to ensure small businesses benefit from the new incentives, and includes sunset dates for the credits.

In short, the package of reforms more effectively targets job creation in the state’s most distressed areas and allows us to evaluate and revisit the programs over time based on performance. That’s a win, at long last, for Californians and California.

Beyond EZ Reform

Beyond EZ reform, we will be monitoring two issues in particular. First, while there is much to celebrate in the budget agreement, the package of reforms also includes the establishment of a business incentive fund, to be administered by the Governor’s “GO-Biz” office to retain and attract business in California. The Governor used the signing of the new package to comment on Texas Governor Rick Perry’s travels to California earlier in the year in an effort to attract businesses to Texas, saying, “Those fellas in Texas, watch out…California has some new tools.” The Governor’s remarks point to an underlying problem with the new business incentive fund, in that it could be used to engage in a zero-sum, state-to-state competition for business, rather than investing in new jobs overall. A critique of the prior EZ system was that it encouraged local jurisdictions in the state to compete for businesses and jobs, rather than creating new opportunities. The same critique can just as easily be applied to the new business incentive fund if it merely results in state-vs.-state gaming of the system. Further, it perpetuates myths that lower state taxes inevitably result in state economic growth and that business location decisions are influenced by tax credits — claims that are clearly not supported by research. Fortunately, the new fund is limited in size ($30 million in 2013-14) and is subject to the same evaluation and performance requirements noted above, but how the fund is used in the coming years is worth watching closely.

Second, in the deliberations about EZ reform, local leaders opposing the reforms often noted that the elimination of Redevelopment Agencies (RDAs) in 2011 and restructuring of the EZ program would leave local governments with few available tools to promote local economic development and redevelopment. From our vantage point, RDAs and EZs were poorly structured to achieve these goals. But their elimination (RDAs) and reform (EZs) expose a significant gap in state and local economic development and redevelopment, particularly in terms of affordable housing. With EZ reform at long last a reality, it is time for state and local leaders to identify effective strategies and tools that position the state for growth and broadly shared prosperity.

— Chris Hoene and Kristin Schumacher


State Revenues Continue to Bear the Mark of the Great Recession

July 18, 2013

The budget signed by Governor Brown last month assumes that state revenues will total $137.0 billion in 2013-14. This consists of $97.1 billion in General Fund revenues — the primary source of funding for state services — and $39.9 billion in special fund revenues — proceeds of taxes, licenses, and fees that are designated by law for specific purposes.

These estimates are remarkable for a couple of reasons. First, revenues as a percentage of the California economy in 2013-14 are projected to be roughly equal to the 40-year average, which is 7.5 percent. In other words, as a share of the state’s $1.8 trillion economy — as measured by state personal income — revenues in 2013-14 are expected to come in right around the historical trend line going back to 1974-75. This is notable because California voters approved two tax measures last November — Propositions 30 and 39 that are projected to boost state revenues by about $7 billion in 2013-14. The fact that revenues are expected to be near the historical average in 2013-14 even with the new revenues approved by voters — rather than significantly above that average — highlights the deep hole that the Great Recession and years of tax cuts created in the state’s tax system, which Propositions 30 and 39 helped to fill.

The 2013-14 revenue estimates are also remarkable for a second reason: Total projected revenues — $137.0 billion — are more than $20 billion below the level they likely would have reached if the Great Recession had not occurred, as we explained in a blog post earlier this year. In other words, if California’s economy hadn’t hit a steep downward slide in 2008 and instead had increased to $2.2 trillion by 2013 (as state analysts expected back in 2007), total state revenues likely would exceed $160 billion in 2013-14, based on revenues comprising 7.5 percent of the state’s economy. Instead, California’s smaller-than-expected $1.8 trillion economy is projected to generate less than $140 billion to support state services during the current fiscal year. This $20 billion-plus revenue gap represents dollars that are not available to support state investments in education, child care for working families, transportation, and other public systems and services that promote economic growth and broadly shared prosperity.

Of course, it’s possible that revenues will surpass the level assumed in the 2013-14 budget. For one thing, lawmakers adopted the Governor’s relatively conservative General Fund revenue projection for 2013-14, which was $2.7 billion below the Legislative Analyst’s forecast. For another thing, the state finished 2012-13 — which ended on June 30 — with General Fund revenues running just over $2 billion (2.1 percent) ahead of the Governor’s May Revision forecast. Yet, even if total state revenues in 2013-14 come in a few billion dollars higher than anticipated, that larger amount would still be close to the historical average as a share of California’s economy (7.5 percent) and would remain far below the level that revenues likely would have reached but for the Great Recession.

— Scott Graves