Schwarzenegger Says Budget Package Puts State on Road to Fiscal Responsibility

The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.

By Laura Mahoney

SACRAMENTO, Calif.—California Gov. Arnold Schwarzenegger (R) signed a package of budget bills that closes a $24 billion deficit without raising taxes by making steep spending cuts, accelerating collection of income tax, borrowing, and shifting funds. [A.B. 1xxxx, A.B. 17xxxx, and A.B. 18xxxx, enacted 7/28/09]

The governor used his line-item veto authority to cut another $656 million from the package to compensate for lawmakers' failure to pass A.B. 30xxxx, which would have allowed the state to take $1 billion in gasoline excise tax revenue due to cities and counties for the next two fiscal years. Although the Senate passed A.B. 30xxxx, Assembly members balked at voting on the bill in the final hours of a marathon 24-hour floor session.

Lawmakers sent the package, without the gasoline tax bill and another bill that would have allowed the state to open its coastline to offshore oil drilling, to the governor. The package is meant to plug a growing hole in the budget plan already in place for the fiscal year that began July 1.

Schwarzenegger signed the main budget bill, A.B. 1xxxx, and 29 other budget trailer bills that implement the spending and policy changes in the main bill. The package includes two bills—A.B. 17xxxx and A.B. 18xxxx—that accelerate or improve tax collections. All of the bills were adopted under the rules of the Fourth Extraordinary Session of the Legislature.

“This is not an easy budget, but it is a necessary budget that does not raise taxes, solves the $24 billion dollar deficit and includes long-term reforms,” Schwarzenegger said in a press release. “I see the real Californians that will be affected by the decisions made within this budget and nothing guarantees revenues won't drop further, but this budget puts us on a path toward fiscal responsibility so we can focus on bringing jobs back to get California moving forward again.”

Provisions of Two Tax Bills

A.B. 17xxxx accelerates revenue by $1.7 billion in the 2009-10 fiscal year by increasing personal income tax withholding on wage earners by 10 percent. The withholding provision applies to wages paid on or after Nov. 1, 2009.

The bill also accelerates revenue by $610 million in the fiscal year by requiring individual and corporate estimated tax payments of 30 percent of liability in April, 40 percent in June, no payment in September, and 30 percent in December. These provisions apply beginning with the 2010 taxable year.

In the meantime, the altered estimated payment schedule for the 2009 taxable year that was adopted as part of a budget fix in February will remain in effect. Under that schedule, taxpayers must make estimated payments of 30 percent of liability in April and June, and 20 percent in September and December.

A.B. 18xxxx requires businesses with annual receipts of $100,000 or more that are not retailers but provide services to register with the State Board of Equalization and file annual use tax returns.

It also conforms state law to federal law by requiring businesses to engage in backup withholding of 7 percent for nonwage payments, made on or after Jan. 1, 2010.

Overall, the package uses $15.6 billion in cuts, $3.9 billion in revenue solutions, including the two tax bills, $3.1 billion in borrowing, $500 million in fund shifts, and $1.2 billion in deferrals and other mechanisms to close a $24.2 billion deficit and leave a reserve of about $500 million.

Both bills take effect Oct. 26, 90 days from enactment.

A.B. 17xxxx is available at http://www.leginfo.ca.gov/pub/09-10/bill/asm/ab_0001-0050/abx4_17_bill_20090728_chaptered.html.
A.B. 18xxxx is available at http://www.leginfo.ca.gov/pub/09-10/bill/asm/ab_0001-0050/abx4_18_bill_20090728_chaptered.html.
The governor's press release is available at http://gov.ca.gov/press-release/12903/.