Governor Newsom has Proposed the Fourth State Budget of His Term, and It’s a Doozy.

An analysis by Loren Kaye president of the California Foundation for Commerce and Education

The proposed budget tops out at more than a quarter-trillion dollars, larger than the entire economies of Vietnam, the Czech Republic or Portugal. The Governor projects a budget surplus topping $45 billion next year, on top of a $75 billion surplus in the current year.

The fiscal fortunes are a direct result of strong economic performance by key California economic sectors, notwithstanding the disease and dislocation brought on by the Covid-19 pandemic. Income tax revenues will increase by $10 billion, on the strength of near-record capital gains from investors and entrepreneurs; corporate tax revenues are more than 80% higher than originally forecast this year. Strong and consistent business activity in the face of natural and self-inflicted challenges lay at the heart of California’s extraordinary fiscal performance.

The Governor’s plans for this bounty include:

  • Saving much of it in various budget reserves in anticipation of the inevitable downturn of the economic cycle,
  • Eliminating budgetary debt and reducing retirement liabilities, and
  • Focusing most of the remaining surplus on one-time spending, as opposed to ongoing liabilities or entitlements.

The major exception to the last point is the constitutionally-required increase in spending for public schools and community colleges, which will increase dramatically. Total per-pupil spending for public school students will top $20,000 for the first time. The budget proposes to increase child care slots by 36,000 next year, on top of 110,000 added this year.

The Governor addressed key concerns of California employers by responding to CalChamber’s request to pay down $3 billion of a nearly $20 billion deficit that has accrued to the Unemployment Insurance Fund in the wake of massive unemployment due to the pandemic. Through allocation of these funds, the Governor will help avert the prospect of additional, huge multi-year payroll tax increases on employers and work toward stabilizing the fund for employees who need the assistance in the future.

The Governor also worked with CalChamber to restore tax credits, including the Research and Development tax credit and the ability to utilize net operating losses. The $5.5 billion to restore these tax incentives and tools will spur innovation and create high-paying jobs in all regions of California in many diverse economic sectors.

CalChamber President and CEO Jennifer Barrera commended Governor Newsom for “taking decisive action in his proposed budget to address some of the state’s most pressing issues and making commitments that will strengthen California’s economy and improve quality of life for all Californians.”

The Governor proposed a continuation of the state’s earlier efforts to support small businesses that have been disproportionately impacted by this pandemic with additional financial relief through tax relief, fee waivers and grants.

The Governor’s budget also recognized the devastating impact a continued drought could have on California communities and the economy by providing General Fund support for drought relief projects, including $500 million to expand support for critical drinking water emergencies and mitigate drought damage to fish and wildlife, and the investments will also support small farmers and ranchers and water systems facing a loss of water supply.

The Governor also set aside $45 million for a strategic media marketing campaign to continue to the recovery of California’s travel and tourism industry – perhaps the hardest hit of all industries in the state.

Even as California’s unemployment rate improves, many employers still struggle finding new workers, and many prospective employees do not have the skills necessary for available jobs. Recognizing this, the Governor has proposed expansion of several workforce programs, especially focused on health care, energy, and economically transitioning communities.

To combat the scourge of smash-and-grab crimes, the Governor followed through on earlier commitments by allocating $285 million over three years for grants to bolster local law enforcement and prosecutor response to organized retail theft.

To be considered when the budget is revised in May is the possibility of tax rebates. A little-used provision of the Constitution requires tax rebates and supplemental school spending if tax revenues exceed a spending limit set by a four-decade-old formula. The Governor expects that requirement to come into play this year, the specifics of which will be determined this spring.

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