California Governor Wants Tax Overhaul, Can’t Get It

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By Laura Mahoney

California Gov. Jerry Brown (D) plans to offer a framework for a state tax overhaul, but won’t push a proposal through before his term ends in December because he doubts lawmakers would support major changes this year.

“I think it will be very hard to get any bill passed, but I think we can put out a framework that will enable the next governor to handle the problem as he sees fit,” Brown said May 11.

Brown said he has asked Department of Finance Director Michael Cohen to prepare various frameworks for tax changes that would position future lawmakers and governors to act if the political will exists.

“I don’t think a mere governor can mobilize it,” he said. “It will take the business community. It will take a wide spectrum of California leaders.”

Capital Gains

Any tax changes must address the state’s heavy reliance on personal income tax revenue from volatile capital gains, the governor said. Such an approach would reduce the tax burden on the wealthy, which isn’t politically popular.

Beyond capital gains tax changes, the state would need to expand some taxes and reduce others, he said, without offering more specifics.

Brown’s lack of optimism isn’t a good sign for Sen. Robert Hertzberg’s S.B. 993, which he introduced May 9 to impose a 3 percent tax on services in exchange for a 2 percent reduction in the sales tax rate. Hertzberg wants to broaden the state tax base to make it less volatile.

Brown made his remarks at a news conference to release his revised budget proposal for the fiscal year that starts July 1. It was the final major budget proposal of his two four-year terms in office during his second stint as California’s governor. He also served as governor from 1974 to 1983.

Federal Changes

Although his final budget doesn’t include major tax changes, Brown’s updated plan offers more detail about the impact of the new federal tax law ( Pub. L. No. 115-97) on state revenue:

  •  withholding on wages is stronger than expected so far in 2018 likely due to one-time bonuses to high-income earners, contributing to a 4.2 percent increase in personal income tax revenue projected to be $95 billion in the 2018-19 fiscal year;
  •  sales tax collections are higher than expected primarily due to stronger growth in capital investment, contributing to a 3.5 percent increase in sales tax revenue projected to be $26.7 billion in the next fiscal year; and
  •  revenue from repatriation of overseas profits is expected to be $50 million in the current fiscal year and $150 million in the next fiscal year.

Strong Revenue

Overall, the governor is proposing a $137.6 billion general fund budget for the 2018-19 fiscal year, Cohen told reporters. The total state budget including federal funds and special funds would be $199.3 billion.

Revenue has been higher than projected throughout the year, creating a surplus of $8.8 billion, Cohen said.

Lawmakers are debating the governor’s budget plan and are proposing various ways to spend the surplus, including a $1 billion boost in health care spending to expand Medicaid to young undocumented immigrants, offer a refundable tax credit for health care premiums, and fund more medical students. They must approve the budget plan and send it to Brown by June 15.

Brown must sign the package by July 1, and can use his line-item veto authority to eliminate items he opposes.

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif., at lmahoney@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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