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IN THIS ISSUE – “Judgment day is coming, baby”
Bob Hertzberg, former state Senator & Assembly Speaker, on California’s chaotic Budget
- California’s Broken Budget – A Fix is Possible, “But the Politics is Tough”
- State Leaders Watch April Tax Filings Closely
- of Finance Says Revenue Down $5.8 Billion
- Meanwhile, Assembly Shuffles Committee Seats
- Power Upgrades Needed for Two-Thirds of Electrical Grid
- Delaine Eastin, First Woman Supt. of Public Instruction, Passes
Capital News & Notes (CN&N) curates California policy, legislative and regulatory insights from dozens of media and official sources for the past week. Please feel free to forward this unique client service.
FOR THE WEEK ENDING APRIL 26, 2024
California’s Broken Budget – A Fix is Possible, “But the Politics is Tough”
LA Times commentary from George Skelton
Borrowing an old bromide, when the stock market sneezes, California’s state government catches pneumonia.
It’s more than a common cold when the state coughs up billions of buckets in red ink.
Wall Street recently has exhibited robust health, but Sacramento is still suffering from the market’s fall two years ago.
This is what happens when the state becomes too dependent on rich people for tax revenue. The rich play the stock market and when it pays off, Sacramento reaps a hefty chunk. When the market busts, so does the state budget because capital gains earnings drop.
The market tumbled in 2022. So California’s stock players had less income to report in 2023 — and significantly less in taxes to pay.
“Judgment day is coming, baby,” former state Sen. Bob Hertzberg (D-Van Nuys) said when I called him with new tax numbers. Hertzberg, also a former Assembly speaker, is one of the few politicians who ever had the guts to try to fix California’s flawed tax system.
“I hated the subject with every bone in my body,” he recalls, “but I did it to prevent what’s happening today.”
This is what we’re talking about:
Based on the 2021 tax year, the top 1% of California earners paid virtually half — 49.9% — of the state personal income tax. But when stocks fell in 2022, the top 1% kicked in just 38.7% of the income tax that was collected in 2023, according to new figures just released by the state Franchise Tax Board.
That’s a dramatic drop and it’s primarily why state politicians currently face a budget deficit of around $40 billion, if you accept Gov. Gavin Newsom’s latest numbers from January. But the gap could be as big as $73 billion, according to the nonpartisan Legislative Analyst’s Office.
Either way, it’s a gargantuan hole in the proposed $292-billion state spending plan Newsom sent the Legislature in January. As he does every year, the governor will revise the budget proposal in mid-May.
Bottom line: Sure, there’s overspending. But Caliifornia’s fiscal headache is largely the result of an unstable state tax system that relies too heavily on the rich. And politicians are too cowardly to fix it.
After all, “taxing the rich” has a popular ring. It’s an easy sell to most voters who aren’t rich.
But it’s an irresponsible policy that creates chaos in budget planning and drives some well-heeled taxpayers out of the state.
OK, the unreliable tax system makes it tougher on Sacramento budget crafters. So what?
So, there’s a much bigger problem. Programs must be cut that politicians approved two years ago when there was an unprecedented $100-billion budget surplus. Many are worthwhile public services.
Los Angeles Times reporter Mackenzie Mays last week listed several pilot programs now on the chopping block. They include new ways to support struggling foster kids, help oil workers transition to cleaner industries, prevent more people from becoming homeless and fund low-income housing.
If Newsom and the Legislature do their jobs properly, there’ll be lots more cutting before they pass a new state budget by the June 15 deadline. Schools, parks and healthcare could be targets.
Based on their past records, however, they’ll “balance” the budget with a lot of temporary band-aid gimmickry rather than actual spending cuts. Gimmickry such as moving the state payroll date forward by one day into the new fiscal year.
It’s one thing to spend liberally. California’s state government is run by liberals and their political campaigns are bankrolled by liberal interests, after all. But it’s irresponsible not to adequately fund the liberal spending with a reliable tax system.
Here’s another example of how the state relies too heavily on rich people’s earnings: For the 2021 tax year, the top one-tenth of 1% — only 17,900 taxpayers — supplied 29.1% of the income tax. That drastically fell the next year to 19.4%.
The income tax supplies two-thirds of the state’s general fund. Back in 1950, when our tax system was stable, it accounted for only 10%. Then, the sales tax was the main revenue source. But we’ve become less of a retail economy and more of a service economy. And we’re one of the few states that doesn’t tax services.
Our tax system was made even more volatile 12 years ago when, at Gov. Jerry Brown’s urging, voters raised the top income tax rate by three percentage points to 13.3%. Now a recession isn’t even needed to blow a hole in the state budget, as we just saw.
The solution should be to flatten the tax system and ease the volatility. Reduce the highest income tax rates and extend the sales tax to services. Not haircuts, lawn mowing and babysitting. But attorney, accountant and architectural fees — things the wealthy pay for — and Dodgers and Lakers tickets.
“That’s exactly the right solution,” Hertzberg says, “but I don’t think it’s possible.”
Hertzberg tried to promote taxing only services that businesses pay — and can deduct on their income tax. “If you can write it off, it’d be taxable,” he says.
“But the politics is just tough.”
People get skittish at the mention of taxing anything that’s not already taxed.
Former state Controller Betty Yee, who’s running to replace Newsom in 2027, advocated tax reform for years but ultimately backed off.
“I just don’t think there’s an appetite for it,” she says. “With any kind of change, you have winners and losers.”
She got beat up by perceived losers.
California will continue muddling along with a flawed tax system that hurts people when stocks inevitably fall — whether they play the market or not.
State Leaders Watch April Tax Filings Closely
CalMatters commentary from Dan Walters
Last week was the deadline for filing personal income tax returns, and income taxes are by far the most important source of state revenue. What’s collected this month will have a big effect on the size of the state budget deficit that Gov. Gavin Newsom and legislators must cover, at least on paper, by June 15.
Before April, state revenues from all sources were running $5.6 billion below what Newsom had projected for the current fiscal year in his proposed 2024-25 budget, according to the governor’s budget staff.
The shortfall indicated that the deficit Newsom pegged at $38 billion for the 2023-24 and 2024-25 fiscal years would be substantially greater. The Legislature’s budget analyst, Gabe Petek, declared that under Newsom’s budget the deficit was really $58 billion and that revenue shortfalls already experienced and projected to worsen would push the gap to $73 billion.
The immense disparity between the Newsom administration’s budget picture and Petek’s analysis remains unresolved, but the net personal income tax collections tracked by the controller’s office so far in April appear to be hitting the $16.3 billion administration estimate for the month.
What happens in the seven-plus weeks remaining before the June 15 constitutional deadline for budget passage will center on two related factors: settling on a deficit number and deciding what actions can be taken that would reduce it to zero.
Newsom will release a revised budget in May that probably will peg a deficit that’s larger than what he declared in January in his original budget, but smaller than Petek’s. Newsom will also declare that a recent agreement with legislative leaders on a package of spending cuts, deferrals, loans and other actions will initially reduce the deficit by $17 billion.
https://calmatters.org/commentary/2024/04/california-budget-deficit-questions-deadlines/
Dept. of Finance Says Tax Revenue Down $5.8 Billion
State Dept. of Finance
Preliminary General Fund agency cash receipts were $243 million, or 1.6 percent, below the 2024-25 Governor’s Budget forecast for March, and $5.8 billion, or 4.0 percent, below the fiscal year-to-date forecast of $146.0 billion.
The Governor’s Budget forecast was completed in late November; therefore, the fiscal year-to-date variances in this report reflect variance since then. A $683-million overage in March personal income tax receipts was offset by shortfalls in sales and use tax (down $653 million for the month) and corporation tax (down $247 million).
Fiscal year-to-date, personal income tax contributed $3.4 billion to the overall shortfall (personal income tax estimated payments were down $4.7 billion, withholding was up $887 million), corporation tax receipts were cumulatively $1.4 billion below forecast largely due to higher refunds, and sales tax receipts were $1 billion below forecast due to ongoing weakness in taxable sales.
Since March is not a particularly important month for personal income tax and corporation tax, final personal income tax and corporation tax payments for tax year 2023 due in mid-April will provide a more complete picture on cash receipts related to tax year 2023.
Personal income tax cash receipts were $683 million above forecast in March due to payments exceeding the forecast by $448 million and refunds coming in $249 million lower than projected.
This brings the fiscal year-to-date shortfall in personal income tax receipts to $3.4 billion, or 3.9 percent. Withholding receipts were $887 million above forecast cumulatively through March.
While withholding reflects more of a real-time indicator of economic activity than estimated payments, single-month readings can be misleading: calendar changes can affect when payments are recorded, and the timing of stock-based compensation can also affect payments, therefore, withholding should be evaluated over multiple months for longer-term trends.
Personal income tax withholding receipts were 2.1 percent above forecast for November through March and increased by 6.9 percent year-over-year over that same period. Personal income tax estimated payments exceeded the forecast by $28 million in March but remained $4.7 billion below forecast fiscal year-to-date, indicating weakness in tax receipts related to tax year 2023.
Corporation tax cash receipts were $247 million below forecast in March and $1.4 billion, or 5.3 percent, below the fiscal year-to-date forecast. The March shortfall was due to Pass-Through Entity Elective Tax payments ($292 million below forecast) and corporation estimated payments ($59 million below forecast) falling below projections, partly offset by lower refunds ($43 million below forecast).
Sales and use tax cash receipts were $653 million below forecast in March and $1 billion, or 3.8 percent, below the fiscal year-to-date forecast. While the March shortfall was partially due to timing issues that shifted some receipts from March to February, the fiscal year-to-date shortfall and longer-term sales tax receipts trends reflect ongoing weakness in taxable sales.
California personal income increased by 4.2 percent in 2023 after a 0.2-percent decline in 2022, while U.S. personal income grew by 5.2 percent after 2-percent growth in 2022. California’s share of U.S. personal income stayed relatively the same, dropping slightly to 13.7 percent in 2023 after decreasing to 13.8 percent in 2022.
U.S. headline inflation increased to 3.5 percent year-over-year in March 2024, up 0.3 percentage point from February 2024 but down 5.6 percentage points from its most recent peak of 9.1 percent in June 2022. Core inflation—which excludes food and energy—remained unchanged at 3.8 percent year-over-year. Shelter inflation remained unchanged at 5.7 percent.
California headline inflation decreased from 3.5 percent in December 2023 to 3.3 percent year-over-year in February 2024. California’s core inflation also decreased to 3.7 percent year-overyear in February 2024 from 3.8 percent in December.
California’s unemployment rate was unchanged at 5.3 percent in March, as civilian household employment decreased by 8,100 persons and unemployment increased by 4,000. California added 28,300 nonfarm payroll jobs in March, driven by private educational and health services (13,600). Six other sectors added jobs in March, government (6,400), professional and business services (5,100), construction (4,600), other services (2,400), trade, transportation, warehousing, and utilities (2,000), leisure and hospitality (600). Four sectors lost jobs in the month: manufacturing (5,300), information (700), mining and logging (300), and financial activities (100).
Year-to-date through February 2024, California permitted 100,000 housing units at a seasonally adjusted annualized rate (SAAR), up 1 percent from January 2024 but down 0.1 percent from a year ago in February 2023. February year-to-date total permits consisted of 64,000 single-family units (down five percent from January, and up 40.5 percent year-over-year) and 36,000 multi-family units (up 13.7 percent from January, but down 34 percent year-over-year).
The statewide median sale price of existing single-family homes increased to $854,490 in March 2024, up 6 percent from February 2024 and up 7.7 percent from March 2023. Sales of existing single-family homes in California were 267,470 (SAAR) in March 2024, down 7.8 percent from February 2024, and down 4.4 percent from March 2023.
Complete DOF report:
https://dof.ca.gov/wp-content/uploads/sites/352/2024/04/Finance-Bulletin-April-2024.pdf
Meanwhile, Assembly Shuffles Committee Seats
Politico Playbook
With little time left to hear bills in policy committees before the legislative deadline in May, Speaker Robert Rivas is switching up committee membership and bumping some members off their panels entirely, according to a memo to the chief clerk Thursday, obtained by Politico.
Rivas and almost all of the affected lawmakers declined to comment on the reasons for relocations, but the move comes after several recent public scuffles between chairs and their committee members that had tongues wagging around the Capitol.
Rivas made the following changes, the memo shows:
— Removing Democrat Damon Connolly from the Utilities and Energy Committee and replacing him with Gregg Hart.
— Removing Republican Bill Essayli from the Budget Committee and Budget Subcommittee No. 3 on Education Finance and replacing him with Greg Wallis.
— Removing Republican Marie Waldron from the Judiciary Committee and replacing her with Essayli.
Connolly’s move came the morning after a hearing during which chair Cottie Petrie-Norris voiced harsh words for her colleague from Marin.
He proposed legislation meant to make it easier and faster to build microgrids, which are sometimes used to preserve power in locales affected by public safety power shutoffs. But prior to Wednesday’s hearing, it was amended to simply study the benefits of microgrids.
Though he accepted the changes beforehand, Connolly still brought the bill up for debate, drawing the ire of Petrie-Norris.
“That was just a master class in how not to handle a consent item,” Petrie-Norris said. “You have disrespected me and you’ve disrespected the time of our colleagues, and I unfortunately will not be able to support this bill.”
The proposal still passed with nine votes, and after the hearing ended, the mood appeared lighter between an apologetic Connolly and Petrie-Norris, who chided him while joking that next time, she would throw the gavel at him.
But the next day, he was off the committee. Rivas and Connolly both declined to comment.
When asked about the reassignment, Petrie-Norris’ office referred Playbook to Wednesday’s hearing.
Similar drama has been bubbling up in the budget committee.
Essayli, a frequent critic of the budget process, has been catching heat for his not-so-frequent appearances on his subcommittee — eliciting resentment that’s recently spilled out into public.
“It is interesting to me when those, sometimes, who complain the loudest are those who have not shown up to subcommittee hearings or submitted any budget letters,” budget chair Jesse Gabriel said at an April 8 hearing on early actions to reduce the budget deficit.
Essayli, at the same hearing, attempted to interrupt the chair and was swiftly chastised.
“You can explain to your constituents why you didn’t show up to those hearings,” Gabriel told Essayli, cutting off his microphone.
Gabriel’s office did not respond to a request for comment on Essayli’s reassignment. Republican Leader James Gallagher declined to comment.
When asked about the tense exchange — and his removal — Essayli said in a statement Thursday he was offering a ”strong, critical voice in the budget process.”
“Evidently asking tough questions of the Governor’s Office is not welcome in the Assembly Budget Committee even when we are facing a $73 billion deficit,” he said. “I look forward to being the only Republican attorney on the Assembly Judiciary Committee and using those skills to scrutinize and question the language and authors of the bills before me.”
Waldron’s office declined to comment on her removal from the Judiciary Committee.
Power Upgrades Needed for Two-Thirds of Electrical Grid
The Hill
More than two-thirds of electricity distribution circuits in the Golden State will require capacity upgrades by 2045 in order to meet electric vehicle (EV) demands, a new study has found.
California must add 25 gigawatts to its capacity by that point — a shift that will cost between $6 billion and $20 billion, according to the study, published Monday in the Proceedings of the National Academy of Sciences.
The massive increase in capacity will be necessary to fulfill forthcoming state targets — such as placing 5 million EVs on the road by 2030.
“This widespread adoption of EVs in the future will lead to a large growth in electricity charging load, which will contribute to challenges in the operation and planning of the power system,” stated the authors, scientists at the University of California, Davis.
By modeling future distribution and capacity scenarios, the researchers determined that the first areas to experience overloads without an upgrade would be population-dense spots like the Bay Area. The intensity and reach of this strain would then increase with time.
Despite the multibillion-dollar price tag associated with upgrading statewide distribution circuits, the authors found that electricity prices are actually likely to decrease by $0.01-0.06 per kilowatt-hour, due to an overall rise in power consumption.
Yet the overall bills of all consumers are still expected to increase — an outcome that the authors attributed to the growth of total electricity consumption.
“The uncertainty could be even higher in actual future upgrade costs,” the authors added, stressing that they did not account for factors like “technology development or bottlenecks.”
Residential areas will require twice as much upgrading as commercial zones will need, suggesting that the state could benefit from a policy shift from home to public or workplace charging, the authors found.
Such changes could be encouraged by boosting the number of chargers available at such locations, or by differentiating charging rates at these sites, they suggested.
“Moving forward, it is crucial to enact regulatory measures to accommodate and mitigate this expected infrastructure strain in the distribution network,” the authors concluded.
Delaine Eastin, First Woman Supt. of Public Instruction, Passes
San Jose Mercury
Delaine Eastin, the first woman to serve as California’s superintendent of public instruction, has died. She was 76.
Eastin was elected to the state office in 1994 and served two terms, overseeing 6 million students in more than 10,000 schools, her representatives said in a statement.
No other woman has held the post since her.
“As the beloved daughter of Hank and Dottie – who emphasized the value of education above all – Delaine will be remembered for her boundless intellect, infinitely compassionate spirit, sharp sense of humor, and courageous leadership in local, state, national, and international realms,” the statement read. “Her love of education, children, animals, gardens, and the arts shined through everything that she did.”
Born in San Diego, Eastin grew up primarily in San Carlos and was a Davis resident. She attended Brittan Acres Elementary School and graduated from Carlmont High School. Eastin later earned a bachelor’s degree from the University of California, Davis, according to The Davis Enterprise.
Following stints in the education and private sectors, Eastin went on to join the Union City City Council in 1980, the newspaper reported. She was then elected to the state Assembly in November 1986, winning the 18th District seat over Republican Martin “Leo” Mehan.
An early legislative victory for Eastin came in 1987 when the governor signed a bill she authored to give a share of state lottery proceeds to the California School for the Blind and the California School for the Deaf, schools that sat on adjoining campuses in her district.
Eastin said she had learned while she was campaigning door-to-door that the special schools were not receiving a share of the lottery money.
“It appeared to be an oversight” in the lottery law, Eastin told Mercury News reporter Lori Eickmann at the time. “The money goes to K-12 programs, community colleges, the California State University, the University of California. So it seemed that special schools should get it, too.” Distribution of the funds began the next year.
The California governor’s office, in a statement posted to social media Wednesday, recalled Eastin as a “trailblazing leader” in education and women in politics.
“Eastin remains the only woman to have served as State Superintendent of Public Instruction, where she fought for CA students,” the post read. “Our hearts are with her loved ones during this time.”
Tony Thurmond, the current superintendent of public instruction, lauded Eastin for championing universal preschool and school nutrition, as well as honoring educators by establishing the state teacher of the year awards.
“Her dedication and foresight to nurturing and preparing students for the future laid the foundation for what has been possible for our students today,” he said in a social media post.
In the mid-1980s to early 1990s, Eastin was among a small group of women serving in the state Legislature. An oral history from her was added to the State Archives just a year ago, in March 2023, after Secretary of State Shirley Weber announced the re-launch of the archives’ oral history project.
“Women were especially close to each other in those days,” Eastin, a Democrat who served parts of Alameda and Santa Clara counties in the Assembly from 1986-1994, recalled in a virtual presentation covered by Orange County Register reporter Hanna Kang. “Women did look after one another because we sort of had to, because we would be dismissed or spoken down to in some instances unless we stood up for each other.”
Examples of sexism were plentiful.
“I remember in the early days, there were people who wouldn’t let me on the members’ elevator because I was a girl, and I couldn’t possibly be a member,” she said.
And then there was that time that an Assembly leader referred to the Women’s Caucus as the “Lipstick Caucus,” Eastin said. “All hell broke loose,” she recalled. “The women were furious.” The legislator ultimately apologized, according to Eastin.
Eastin left elected office in 2003 but dipped her toe back into politics in 2017, when she made a run for governor.
A public celebration of life will be held this summer, Eastin’s representatives said.