California Governor Arnold Schwarzenegger signs the California State budget February 20, 2009.
Thanks to the California state budget that was approved early Thursday morning, my husband and I — relatively new citizens of the Golden State — will help bridge the extraordinary $42 billion deficit next year by paying approximately $1,000 in additional taxes, fees and loss of dependent tax credits. And this figure will remain at that level only if we make no purchases for 12 months in an effort to avoid the new 1-cent-on-the-dollar increase in sales tax.
It is, of course, a better option than getting laid off, not receiving our 2008 tax refund or being unable to drive through an abandoned highway repair project — the brutal realities of a state in freefall with no balanced budget. But it's still a bit of a shock. "The average Californian hasn't figured out exactly what this particular budget means for him or her yet," says Mark Baldassare, president and chief executive officer of the nonpartisan Public Policy Institute of California. "But they're going to feel it soon."
Life in California has been rough enough these last three months as government all but ground to a halt while legislators haggled over the long-overdue budget. The state had to send out $3.3 billion in IOU notices to taxpayers and vendors; thousands of construction projects were stalled; and state offices were furloughed. Finally, after a record-breaking 45-hour Senate session, the elusive two-thirds majority vote was reached to pass a budget plan that includes $15 billion in service cuts and spending reductions, $12.8 billion in temporary tax hikes and $11.4 billion in borrowing.
In addition to the increased sales tax, personal income tax rates will go up 0.25% and the dependent credit will drop from $300 to $100. Vehicle owners will now pay an annual license fee that is 1.15% of their car's value (up from 0.65%). One increase was avoided. In order to secure Republican Abel Maldonado's vote, a 12 cent on the gallon gas tax was nixed (Maldonado also included an open-primary measure and removed a stipulation that would have cost legislators their salaries during times of overdue budgets).
The final budget plan, which Governor Arnold Schwarzenegger signed on Friday, is also dependent on federal stimulus money. California expects approximately $80 billion, although it is not yet clear exactly where this money will be funneled. For instance, if the state determines there is enough money from the federal stimulus package not earmarked for other areas, the personal income tax rate hike could be reduced by half.
There is an irony in passing such a draconian budget in the shadow of President Obama's recent incentives. "This budget plan has been really counter-intuitive from what people have been hearing about the federal stimulus package," Baldassare says. "We recognize that here's a circumstance where the federal government is moving in one direction, which is to encourage [funding] increases and tax cuts to stimulate, and the state is moving in a different direction." However, Baldassare says he is pleased the state budget is finally balanced: "Getting this budget issue behind us was the most important thing California could do in terms of improving our economic outlook."
But while the news that Schwarzenegger finally passed a budget — any budget — does come as a relief to politicians and economists who were gravely concerned about credit ratings and business reputation, a long haul is ahead for citizens and businesses already reeling from the foreclosure catastrophe and high unemployment rates. "This is the most serious budget crisis in my lifetime — and I have gray hair," says Jean Ross, executive director of the nonpartisan California Budget Project. "It will have a significant impact on Californians for the next 18 months and for years to come."
Some of the biggest spending cuts in the new budget — nearly $10 billion — will hit education and social services. Spending on kindergarten through 12th grade will be reduced by $8.4 billion over the next two years. This means teacher layoffs, fewer school days and more crowded classrooms. Higher education funding will also be cut by $888 million at state schools, where students will be expected to shoulder 10% higher fees. And, according to the new budget, $1.5 billion will be saved by eliminating senior citizens' annual cost of living increases and other health services (again, depending on where the federal stimulus package is spent, this figure could drop to $500 million).
Not everyone is devastated by the budget's fine print. It includes tax breaks for large corporations, film companies that keep production in-state, buyers of new homes and small businesses that hire new employees. "The state was about to go over a cliff," says Allan Zaremberg, president and chief executive officer of the California Chamber of Commerce. "No tax in a recession is a good tax. But I think the legislature and the governor went out of way to spread taxes by as many Californians and businesses as possible so the impact would not hurt any one industry or any one individual."
Despite the handshakes and smiles yesterday in Sacramento, the budget crisis is far from over — and the state could be in for a serious citizen backlash over the next few months. In California, tax revenue enhancements must be voted on in a special election. On May 19, voters will determine the fate of $5.8 billion in measures, which also include a permanent state spending cap (which would extend the tax hikes from two to four years) and whether or not to divert money from children's services, mental health programs and the lottery into state coffers.
In other words, Californians need to brace for another wave of campaigning by politicians and special interest groups. "We're most concerned about the spending cap that would not just lock us into our broken health care system and prevent us from restoring or reforming, but it would force us to make cuts to existing services in the future," says Anthony Wright, executive director of the reform-minded Health Access California, who plans to campaign against the proposal.
"It's very possible that the public will not want to go along with keeping the taxes, and they could vote them out if they don't vote for the spending cap," says Tony Quinn, GOP policy analyst and co-editor of the California Target Book. "Most are in favor of a spending cap because the budget is out of balance, but nevertheless, there's no certainty that will pass. This is a continuation of the political battle."