(November 7, 2008) Governor Arnold Schwarzenegger has called a special session of the Legislature and proposed a combination of cuts, taxes and economic stimulus measures to address a budget deficit now estimated at $11.2 billion.

The California Chamber of Commerce is analyzing the proposal, which includes new taxes on businesses and consumers; reducing costly litigation for employers through changes in overtime and meal/rest period requirements; and accelerating the use of infrastructure funding already approved to push dollars into the economy.

Taxes/Revenues

As outlined November 6, tax elements of the Governor’s proposal include:

• A temporary increase in the state sales tax, from 5 percent to 6.5 percent, estimated to generate an additional $3.2 billion in 2008-09 and $6.6 billion in 2009-10 for the General Fund. The sales tax would revert back to 5 percent at the end of three years.
• Broadening the sales and use tax to include certain services, such as vehicle and appliance repairs and sporting and entertainment events. This permanent increase is expected to generate $357 million in 2008-09 and $1.156 billion in 2009-10.
• Imposing an oil severance tax on any oil producer that extracts oil from earth or water in the state. Permanent increase generating $528 million in 2008-09 and $1.195 billion in 2009-10.
• Increasing the alcohol excise tax by 5 cents a drink. This permanent increase is estimated to raise $293 million in 2008-09 and $585 million in 2009-10.
• A $12 increase in annual vehicle registration fees. This permanent increase (offsetting funds shifted from vehicle license fee revenue to support local criminal justice programs) is estimated to provide $150 million in 2008-09 and $359 million in 2009-10 and future years.

To address the solvency of the unemployment insurance fund, the Governor is proposing a gradual increase in the employer-paid tax supporting the fund, combined with a “small reduction” in benefits to maintain the solvency of the fund. The state projects the fund will run deficits of $2.4 billion in 2009 and $4.9 billion in 2010 if no action is taken.

Economic Stimulus

The Governor proposes:

• Injecting about $160 million into the state’s economy by accelerating hospital construction.
• Expediting the use of infrastructure bond monies to create jobs and help un-employed residential construction workers in the areas of the state hit hardest receive training in a new type of construction.
• Providing overtime exemptions and allowing more flexible work schedules to increase productivity to keep high-paying jobs in the state.
• Clarifying meal and rest period requirements to save businesses litigation costs and confusion from meal break violations, resulting in fewer terminations, according to the Governor.
• Reducing barriers to public-private partnerships and “design-build” agreements to permit more infrastructure to be built more quickly and economically, generating more jobs.
• Providing targeted tax credits to keep television and film production and thousands of associated jobs in the state.
• Helping borrowers and lenders modify existing home loans in ways that benefit both parties, thereby reducing foreclosure rates, and making changes in the lending process to help prevent a future mortgage crisis.

Cuts

The Governor proposed $4.5 billion in General Fund reductions, including a $2.5 billion reduction in K-14 allocations, smaller reductions for the University of California and California State University systems, the Department of Corrections and Rehabilitation and public safety grants. Reductions to Medi-Cal and other state-supported social services also are proposed, along with furloughs and two fewer holidays for state employees.

Special Commission

On October 30, the Governor signed an executive order creating a bipartisan commission to re-examine and modernize the state’s tax laws to establish a revenue stream that is more stable and reflective of California’s economy.