The Other Third of California’s Budget

Most people are aware that we spend money on public programs to support various policy goals, but less well known is that we also “spend” a lot of tax money by not collecting it in the first place. Lawmakers and voters can do this by approving exceptions to the state’s (and the nation’s) basic tax structure through what are called “tax expenditures.” The Legislative Analyst’s Office (LAO) estimates that for state fiscal year 2014-15 California would have half again as much General Fund revenue — $55 billion more — if we had no tax expenditures. That’s a big sum of money, and you can bet that if it were program spending, people would scrutinize it with a magnifying glass.

So what do we get from forgoing all this revenue? Do these tax expenditures actually achieve their goals? The truth is, it’s hard to say for sure because we often simply don’t have good data and haven’t done a good job legislating rigorous evaluation and oversight. Tax expenditures vary broadly, ranging from the exemption of most food and candy sales from the sales tax, to the Mortgage Interest Deduction, to tax breaks for businesses, and more. Check out the LAO’s overview of the biggest tax expenditures in California, pros and cons of pushing policy goals through the tax code instead of public programs, and challenges in using them effectively.

— William Chen

Revenue and the Governor’s Proposed 2015-16 Budget: The Administration Has Underestimated State Revenues by Billions of Dollars in Each of the Past Three Years

The debate around the 2015-16 state budget is just gearing up, and — as always — the question of how much money is available will be critical to decisions about funding crucial public services and systems. For each of the three prior years, the Governor’s May revenue projections, which have been similar to his initial projections in January, underestimated revenues by several billion dollars compared to the final figures for the fiscal year. Meanwhile, as we noted a couple weeks ago, many of the public services that help working families climb the economic ladder remain undersupported even as the state’s revenues have surpassed their pre-recession levels and at a time when many Californians are still struggling to get by.

As the chart below shows, the Governor’s May projections were $4.2 billion below actual General Fund revenues for 2012-13 and $5.4 billion below the mark for 2013-14, according to data from the Department of Finance (DOF). Now halfway through 2014-15, the Governor’s projections from last May are $2.7 billion below the DOF’s latest revenue estimate for the current budget year.

Of course, it’s reasonable to be cautious in projecting available resources, in case we hit a sudden economic downturn. However, being overly cautious when the economy is growing means potentially hobbling our own recovery by failing to commit sufficient resources to invest in California’s people and communities. This is like sitting on extra cash when you could be using it to learn new skills or pay for a much needed visit to the doctor’s office.

The Legislative Analyst’s Office (LAO), which makes its own revenue projections each May, similarly has erred on the side of caution. Yet, over the past three years, the LAO has gotten progressively closer to the mark while the Administration’s projections have remained more pessimistic. By the end of 2014-15, the Administration’s May 2014 projection may be even further off the mark than it appears to be now. As the LAO pointed out in its response to the Governor’s proposed 2015-16 budget, tax revenues for 2014-15 will likely be higher than the Administration’s January 2015 estimate by $1 billion to $2 billion, and possibly even more, thanks to a strengthening economic recovery and a surge in revenue collections in December.

To put these revenue figures in context, the University of California, which is in an open dispute with the Governor about its level of funding, asserts that state funding for educating students is still $460 million below its 2007-08 level despite increasing enrollment. In addition, annual funding for subsidized child care and preschool is more than $600 million lower — with nearly 97,000 fewer “slots” — than in 2007-08.

Both the LAO and the Administration note that for 2014-15, higher-than-expected revenues would go to schools and community colleges under Proposition 98, the state’s constitutional minimum funding guarantee for K-14 education. However, given the complexity of Proposition 98 and how it interacts with changing economic circumstances, 2015-16 could well bring a different outcome, with General Fund revenues in the coming budget year freed up for other state priorities. For example, the amount of money coming from higher local property tax collections would make a difference for the state’s General Fund Proposition 98 spending in 2015-16.

It’s not expected that state agencies nail their projections on the head. As Neils Bohr purportedly said, “Prediction is difficult, especially about the future.” But if there is reason to believe that state policymakers have room to do more to help Californians who the economic recovery has yet to reach, they should be doing that now.

— William Chen

Statement: Chris Hoene on the Legislative Analyst’s Office Forecast

In response to the Legislative Analyst’s Office (LAO) long-term fiscal forecast released yesterday, Chris Hoene, executive director of the California Budget Project, released the following statement:

“The new LAO forecast shows that California is well positioned to turn the corner on a decade of severe budget challenges and begin reinvesting in areas that are critical to our state’s economy and to the health and general well-being of communities statewide. Due in part to the new revenues approved by California voters earlier this month, the state has an opportunity to restore balance to the budget and begin rebuilding its key public systems and programs.

“But even with this brighter outlook, it’s important to remember that many years of deep spending cuts have hit virtually all areas of the budget, from education to health care. With our state just starting to recover from the Great Recession and many families still feeling the effects of the downturn, we need to provide a strong safety net and ensure sufficient funding for key services and supports — such as child care — for individuals struggling to find and retain work.

“Moving forward, state policymakers should strive for budget decisions that permanently place the state on solid financial footing while also reinvesting in public systems that are essential to all Californians and to broadly shared economic growth.”

Statement: Jean Ross on the Legislative Analyst’s Office Forecast

In response to the Legislative Analyst’s Office (LAO) long-term fiscal forecast released today, Jean Ross, executive director of the California Budget Project, released the following statement:

“The LAO’s new forecast underscores the fiscal challenges that California continues to face. The outlook suggests that revenues will lag the optimistic forecasts used as the basis of the 2011-12 spending plan and that shortfalls will persist absent significant additional revenues. Unemployment remains stubbornly high, both nationally and here in California, and state and local government job losses are weakening overall job growth.

“The LAO’s report provides a first look at the state’s fiscal outlook for the remainder of this year and beyond. It is important to note, however, that due to the timing of certain personal income tax payments, policymakers lack critical information needed to develop an accurate picture of the state’s fiscal situation. Still, the budget shortfalls forecast by the LAO highlight the need for policymakers to take a balanced approach to addressing the state’s ongoing budget gaps. Without additional revenues, policymakers will be forced to make even deeper cuts to our public schools and universities and other public structures that underpin a strong economy and are essential to the lives of Californians.

“Policymakers should strive to address the state’s fiscal challenges with a multi-year approach that fosters long-term stability. Deeper spending cuts, such as those that would be imposed by the so-called ‘triggers’ in the June budget agreement, will only serve to slow an already struggling economy.”

Statement: Jean Ross on the Legislative Analyst’s Office Forecast

In response to the forecast on the state’s long-term budget situation released Wednesday by the Legislative Analyst’s Office (LAO), Jean Ross, executive director of the California Budget Project, a nonpartisan public policy research group, released this statement:

“Wednesday’s forecast issued by the LAO  shows that California continues to face extremely severe fiscal challenges. The magnitude of future budget gaps reflects the continuing weakness of the state’s economy, the end of aid to states provided by the American Recovery and Reinvestment Act (ARRA), and recent budgets’ reliance upon one-time ‘solutions.’

The LAO’s report highlights the importance of true prison reform. Recent budget agreements have included appropriate reductions in prison spending, however the Legislature has failed to enact the policy changes needed to enable California to significantly reduce growth in corrections and achieve targeted savings.

It is also clear that California cannot continue to cut taxes for the state’s largest and most profitable corporations and balance its budgets. Every dollar lost to recent tax cuts reduces support for education and other public structures essential to the state’s economic future.

The new forecast underscores the importance of a balanced approach aimed at bringing the state’s budget into balance over a multi-year period. Policymakers should strive to do all they can to avoid yet another round of cuts to state services that would further weaken the economy and undermine the effectiveness of programs and services that Californians depend on.”

— Jean Ross