(September 24, 2008) Yesterday, Governor Arnold Schwarzenegger signed a budget adopted by Democrats and Republicans in the State Legislature that relies on $5.8 billion more in taxes on California businesses and investors this fiscal year and $1.6 billion next fiscal year.   

Under the new budget, taxes are being increased or accelerated on companies that suffer business losses, companies that invest in research and development, enterprise zones and manufacturing equipment, limited liability corporations, the self-employed and small businesses. 

The budget provides the opportunity for creation of a “rainy day fund,” strongly advocated by Governor Schwarzenegger. This component was included in a constitutional amendment passed by the Legislature that now requires voter approval. Once the economy turns around, the reform would increase the size of the mandatory budget reserve from almost nothing today to 12.5 percent of General Fund revenues — or approximately $13 billion dollars. The reserve would only be used during budget emergencies or natural disasters.

“While there is some improvement of tax policy by conforming treatment of business operating losses to long-standing federal practice, it is a minimal trade-off for such an enormous increase in business taxes,” said CalChamber President and CEO Allan Zaremberg. Under the new budget, employers who have suffered net operating losses (NOL) due to the downturn will not be able to use this deduction for the next two years and employers who rely on the research and development tax credit and numerous other business tax credits will lose half the value of those credits for the next two years.

The state hopes to raise $1.3 billion in 2008-09 and $240 million in 2009-10 by accelerating quarterly tax payments and $900 million in 2008-09 and $110 million in 2009-10 by eliminating the “safe harbor” protection for quarterly filers with high incomes.  Under new rules, any corporation that underestimates its tax liability by more than $1 million will now be subject to a new 20 percent penalty. The NOL suspension is expected to raise $1.1 billion next year and suspension of business tax credits (such as the R&D credit) is expected to raise $900 million. 

The Governor’s office reports that there were some economic stimulus components in the budget. The budget package provides flexibility in overtime laws for exempt high-paid software engineers. In addition, it expedites the allocation and disbursement of existing transportation and housing bond funds to stimulate economic growth and job creation, and authorizes new lease revenue bonds to accelerate capital outlay projects for higher education. 

Already, early projections indicate that there will continue to be a budget deficit next year. The administration has proposed to reform the Lottery through modernization and hopes to receive at least $10 billion over the next few years from an investor in return for that investor receiving the ongoing receipts due to the lottery modernization.  This proposal also requires voter approval. 

General fund expenditures are approximately equal to last year. Therefore, spending “cuts” referred to in budget discussions mean, for the most part, that there were no cost of living increases for health and welfare beneficiaries and a reduced cost of living adjustment for K-12 education. Medi-Cal reimbursement rates, however, did suffer a 10 percent actual reduction.