State Budget Review

The ink is still drying on the budget bill, but the following identifies some of the key actions passed in the recent state budget. The outline of the final $41 billion budget package is a combination of steep spending cuts, tax hikes, borrowing and provisions meant to boost the state's business climate. The package crafts a two-year budget so that the state doesn't have to endure these debates in the near future. However, there are more hurdles to cross.

The budget includes:

• $12.8 billion in Tax Increases
• $15.1 billion in Spending Cuts
  
• $11.4 billion in Borrowing

The following provides background for each of the activities.

TAXES

Personal income tax rates will rise by 0.25 of a percentage point across the board, beginning with the current tax year. However, there is language in the bill that identifies that the 0.25-point hike could be reduced to 0.125 of a point depending on how much federal assistance the state gets as part of the federal economic stimulus package. The tax increase, no matter what its size, sunsets after the tax year of 2013, basically concludes January 1, 2014.

The state's Sales Tax as a part of the budget deal will push California's base rate to 8.25% from the current 7.25%. Those rates don't include taxes added by individual cities and counties - thus creating upward increases. Additionally, the sales tax increase goes into affect April 1, 2009.

Vehicle License Fees beginning May 19, 2009 will rise from its current level of 0.65 percent of the value of the car to 1.15 percent of its value. The tax increase sunsets on June 30, 2013.

SPENDING CUTS

One of the major areas cut was funding for schools and community colleges. The Legislature slashed $8.4 billion or about $380 per student from the state's $58.1 billion education budget over the next two years. In addition, both the University of California and California State University systems will both see a 10 percent cut. Additionally, CalWorks, the welfare to work program will not provide cost -of -living increases. Also, those that receive state and federal supplemental income such as certain seniors or disabled recipients also will not get state increases.

BORROWING
It appears that the state will be borrowing money to force the budget gap, but there are scant details on this activity.

OTHER

However, the budget is not completed. Voters will be asked to approve six measures on a special election on May 19, 2009. Within the context of this, the voters of the state still have to pass the following:

• Spending Cap (a formula that caps spending at 5 percent)
• Increase Annual Education Funding by $9.3 billion in future years
• Shift Proposition 63 Mental Health Services Monies
• Redirect how Proposition 10, the Cigarette Tax Money is allocated
• Clarify Education Appropriations from the State Lottery
• Deny Pay Increases to Legislators during budget deficits

WHAT DOES THE BUDGET MEAN FOR CALIFORNIANS?

The passage of the budget bill does put back into the motion the continued construction and subsequent deployment of the voter referendums of Ballot Measures A through E that mean in excess of $48 billion for roads, school construction, infrastructure projects for items such as water and levy protection and housing. In addition, while lawmakers are quiet on the details, there appears to be money for items such as highways, roads and bridges, monies to repair schools and colleges, universities, and even money for local governments to buy foreclosed and vacant homes.

Additionally, the state controller was holding payments to all vendors and tax refunds to
state residents. These actions will now begin with the adoption of the budget.

Also, earlier on in the budget discussion, broadening the sales tax was considered for services such as veterinarians, auto repair, golf fees and appliance and furniture repairs.
But this action failed to be included in the package.

WHAT DOES THE BUDGET MEAN FOR BUSINESS?

There has been a variety of hear-say related to the topic of what the new budget means for business. Environmental groups are complaining that it provides relief to construction companies in delaying the conversion to new diesel engines to meet air quality standards. Consumer groups are complaining that it raises taxes on the poor and not on the rich.

About $1 billion in corporate tax breaks -- directed mostly at multi-state and multinational companies -- is tucked into the proposal. Most of the cost to the state -- or $690 million -- would come from changes in the way corporate taxes are computed, lowering the amount owed by many large companies. Under the proposed changes, companies would no longer be required to pay state taxes based on a formula that includes the size of their workforce, the amount of property they own and their total California sales. Instead, they could pay based on total state sales alone. The idea, supporters say, is to stop penalizing companies for expanding their workforces and building new facilities in California. Under current law, the companies' state tax bills grow when they do those things. The $690-million tax break would be embedded in state law permanently.

In addition, a break for small businesses that hire new employees would cost the state $200 million a year. It would provide a $3,000 tax credit for every full-time employee hired by a company with 20 or fewer workers. This incentive will expire after two years.

In an effort to stem the tide of runaway film production the Legislature passed and the Governor signed a series of production incentives for film and television industry.

Set to take effect in 2011, a five-year program will provide up to $100 million per year in tax incentives for qualifying film and TV productions. The three key features of the legislation include:

Studio film projects shooting for less than $75 million can apply for a tax credit amounting to 20 percent of all "qualifying production expenses" -- essentially below-the-line costs.

• Independent film productions of $1 million-$10 million and all TV series relocating to California will qualify for a 25 percent tax credit.
• Productions must locate in the state for 75 percent of shooting days or spend three-fourths of a project's budget in California.
• The state estimates suggest that every $100 spent on production in California returns about $285 in economic output.
• The production incentives program will be regulated through the California Film Commission.

•  $12.8 billion in Tax Increases
•  $15.1 billion in Spending Cuts
•  $11.4 billion in Borrowing

The following provides background for each of the activities.

TAXES

Personal income tax rates will rise by 0.25 of a percentage point across the board, beginning with the current tax year. However, there is language in the bill that identifies that the 0.25-point hike could be reduced to 0.125 of a point depending on how much federal assistance the state gets as part of the federal economic stimulus package. The tax increase, no matter what its size, sunsets after the tax year of 2013, basically concludes January 1, 2014.

The state's Sales Tax as a part of the budget deal will push California's base rate to 8.25% from the current 7.25%. Those rates don't include taxes added by individual cities and counties - thus creating upward increases. Additionally, the sales tax increase goes into affect April 1, 2009.

Vehicle License Fees beginning May 19, 2009 will rise from its current level of 0.65 percent of the value of the car to 1.15 percent of its value. The tax increase sunsets on June 30, 2013.

SPENDING CUTS

One of the major areas cut was funding for schools and community colleges. The Legislature slashed $8.4 billion or about $380 per student from the state's $58.1 billion education budget over the next two years. In addition, both the University of California and California State University systems will both see a 10 percent cut. Additionally, CalWorks, the welfare to work program will not provide cost -of -living increases. Also, those that receive state and federal supplemental income such as certain seniors or disabled recipients also will not get state increases.

BORROWING
It appears that the state will be borrowing money to force the budget gap, but there are scant details on this activity.

OTHER

However, the budget is not completed. Voters will be asked to approve six measures on a special election on May 19, 2009. Within the context of this, the voters of the state still have to pass the following:

• Spending Cap (a formula that caps spending at 5 percent)
• Increase Annual Education Funding by $9.3 billion in future years
• Shift Proposition 63 Mental Health Services Monies
• Redirect how Proposition 10, the Cigarette Tax Money is allocated
• Clarify Education Appropriations from the State Lottery
• Deny Pay Increases to Legislators during budget deficits

WHAT DOES THE BUDGET MEAN FOR CALIFORNIANS?

The passage of the budget bill does put back into the motion the continued construction and subsequent deployment of the voter referendums of Ballot Measures A through E that mean in excess of $48 billion for roads, school construction, infrastructure projects for items such as water and levy protection and housing. In addition, while lawmakers are quiet on the details, there appears to be money for items such as highways, roads and bridges, monies to repair schools and colleges, universities, and even money for local governments to buy foreclosed and vacant homes.

Additionally, the state controller was holding payments to all vendors and tax refunds to state residents. These actions will now begin with the adoption of the budget.

Also, earlier on in the budget discussion, broadening the sales tax was considered for services such as veterinarians, auto repair, golf fees and appliance and furniture repairs.

But this action failed to be included in the package.

WHAT DOES THE BUDGET MEAN FOR BUSINESS?

There has been a variety of hear-say related to the topic of what the new budget means for business. Environmental groups are complaining that it provides relief to construction companies in delaying the conversion to new diesel engines to meet air quality standards. Consumer groups are complaining that it raises taxes on the poor and not on the rich.

About $1 billion in corporate tax breaks -- directed mostly at multi-state and multinational companies -- is tucked into the proposal. Most of the cost to the state -- or $690 million -- would come from changes in the way corporate taxes are computed, lowering the amount owed by many large companies. Under the proposed changes, companies would no longer be required to pay state taxes based on a formula that includes the size of their workforce, the amount of property they own and their total California sales. Instead, they could pay based on total state sales alone. The idea, supporters say, is to stop penalizing companies for expanding their workforces and building new facilities in California. Under current law, the companies' state tax bills grow when they do those things. The $690-million tax break would be embedded in state law permanently.

In addition, a break for small businesses that hire new employees would cost the state $200 million a year. It would provide a $3,000 tax credit for every full-time employee hired by a company with 20 or fewer workers. This incentive will expire after two years.

In an effort to stem the tide of runaway film production the Legislature passed and the Governor signed a series of production incentives for film and television industry.

Set to take effect in 2011, a five-year program will provide up to $100 million per year in tax incentives for qualifying film and TV productions. The three key features of the legislation include:

• Studio film projects shooting for less than $75 million can apply for a tax credit amounting to 20 percent of all "qualifying production expenses" -- essentially below-the-line costs.
• Independent film productions of $1 million-$10 million and all TV series relocating to California will qualify for a 25 percent tax credit.
• Productions must locate in the state for 75 percent of shooting days or spend three-fourths of a project's budget in California.

The state estimates suggest that every $100 spent on production in California returns about $285 in economic output.

The production incentives program will be regulated through the California Film Commission.

By: Tim Johnson of the California Business Minute