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Brown Says More Automatic Cuts to Come If California Tax Plan Voted Down

California Governor Jerry Brown will seek a second round of automatic spending cuts that would be triggered if voters reject temporary increases in income and sales taxes he wants to bridge a $13 billion deficit.

Brown said he’ll include projected revenue from the tax increase in the budget he proposes next month, even though voters won’t have a say on the higher levies until November. If his plan is rejected, it would blow a hole in what Brown said would be a balanced budget for fiscal 2013. Automatic cuts would be needed to eliminate that shortfall, Brown said.

Californians already face automatic cuts if $4 billion in revenue gains built into this year’s spending plan fail to materialize. Higher education and services for the disabled would be reduced if the state falls short of estimates by $1 billion. The school year could be cut by the equivalent of seven days if the shortfall is $2 billion or more.

“We’re going to balance the budget,” Brown said in an interview in Los Angeles Dec. 6. “We’ll propose cuts and the taxes, and if the taxes don’t materialize, I will propose we have trigger cuts that go into effect immediately.”

Such mid-year cuts are unpopular with voters, according to a Field Poll released Dec. 5. Sixty-five percent of 1,000 registered voters surveyed Nov. 15-27 said it was a bad idea to include the trigger provision in the current budget. The poll, a nonpartisan sampler of opinion in California, had a margin of error of plus or minus 4.5 percentage points.

Ballot Initiative

Brown, a 73-year-old Democrat, is pressing for a ballot initiative to increase revenue $7 billion a year by temporarily raising income taxes on those making more than $250,000 a year and boosting the statewide sales tax by 0.5 percentage point to 7.75 percent. He would dedicate the gain to schools and to shifting thousands of prison inmates to county jails.

The governor proposed raising levies on individuals making $250,000 a year to 10.3 percent, from 9.3 percent. For those earning $300,000 to $500,000, the rate would climb to 10.8 percent from 9.3 percent. For single filers with income above $500,000, the rate would rise to 11.3 percent from 9.3 percent. Californians with income of more than $1 million are now taxed at 10.3 percent.

“We hacked a $26 billion deficit down to about $10 billion and we’re going to take out the rest of it with more cuts and hopefully some temporary taxes,” Brown said.

California tax collections since the start of the fiscal year have trailed projections by about $1 billion, while spending for the period is almost $2 billion over budget, state Controller John Chiang reported yesterday.

Revenue Prediction

The state Legislative Analyst’s Office has estimated that revenue for the year will be $3.7 billion below budget, which would mean a deficit of $13 billion through June 2013. Brown’s finance department, which is developing its own revenue prediction, will use whichever estimate shows higher revenue to determine how much spending must be eliminated.

“Regardless of whether midyear cuts are enacted next week, the Legislature faces a tremendous fiscal challenge when it returns to session next month,” Chiang said in a statement.

Brown included the automatic cuts in his budget after he failed to win Republican support to keep tax and fee increases from expiring. He and Democrats decided at the time that the nascent economic rebound was likely to boost tax revenue $4 billion beyond what was predicted just a month earlier.

The recovery was shaken by Europe’s widening debt crisis and an impasse over raising the U.S. debt ceiling. The automatic cuts provision was intended in part to ensure that the state had enough cash on hand to repay investors who bought $5.4 billion of short-term cash-flow notes.

‘Holding Taxpayers Hostage’

Republican Assembly Leader Connie Conway of Tulare accused Brown of “holding taxpayers hostage with the threat of more cuts to our classrooms.”

“We shouldn’t squeeze more out of existing taxpayers who are already struggling to make ends meet,” she said yesterday in a statement.

Brown, who served two terms as governor from 1975 to 1983, also called for a change in the way department budgets are set, in order to curb costs and boost efficiency.

He said he wants agencies to use so-called zero-based budgeting, which means every dollar must be justified each year instead of adding funds to the previous year’s spending.

To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net. Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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