Brown’s Budget Sends ‘Ransom Note’ to California Voters on Tax Increases

California (STOCA1) Governor Jerry Brown proposed a budget that would lop off the equivalent of three weeks from the public school year if voters reject his proposal for $7 billion in temporary tax increases.

The $92.6 billion spending plan Brown unveiled yesterday for the year that starts in July boosts spending by 7 percent from the current year, even though the state faces a $9.2 billion deficit. The increase is to be financed through economic growth (BCAX), higher income taxes on those making at least $250,000 a year and expanded sales levies.

Brown, a 73-year-old Democrat who approved $16 billion in cuts last June, said the state would have to slash another $4.8 billion from education if voters fail to approve his tax plan at the polls in November. The largest U.S. state by population has perennial budget crises and Standard & Poor’s worst credit rating among its peers.

“It’s the most expensive ransom note in California political history,” Dan Schnur, a former aide to Republican Governor Pete Wilson and now director of the Jesse M. Unruh Institute of Politics at the University of Southern California in Los Angeles, said yesterday in a telephone interview.

Brown wants to raise income taxes on individuals making at least $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. For single filers with income above $500,000, the tax would rise to 11.3 percent. Californians with income of more than $1 million are now taxed at 10.3 percent.

Sales Taxes

He also wants to boost retail sales taxes to 7.75 percent from 7.25 percent. The higher income and sales levies would expire after five years.

Brown has been trying to forge a coalition with unions and some business groups to raise the money needed to gather enough signatures to put the measures on the ballot. His effort for a voter initiative on higher taxes last year was blocked by Republican lawmakers.

“There are people who say we shouldn’t scare the voters,” Senate President Pro Tem Darrell Steinberg, a Democrat from Sacramento, told reporters in the capitol yesterday. “I agree with that. But on the other hand, it is our obligation, the governor’s obligation, to inform the voters. The voters aren’t going to want to lose three weeks of the school year.”

Brown dismissed the notion that he was threatening to cut school funding to win support for his tax increase. His finance director, Ana Matosantos, noted that public schools, from kindergarten through 12th grade, account for 40 percent of state spending.

‘Where the Money Is’

“That’s where the money is,” Brown told reporters at a news briefing yesterday.

The new budget, Brown’s second since taking office one year ago, would slice $4.2 billion from existing spending, including almost $1 billion from welfare and another $842 million from the state’s health insurance program for the poor. School spending will increase by $4 billion, or 11 percent under his plan.

Brown’s proposal to cut health-care and welfare programs while maintaining education spending illustrates the disparate view voters have of those expenditures, Schnur said.

“There are lot more Californians who attended public school, or who have kids in school, than who receive health-care or welfare benefits,” Schnur said. “This budget recognizes the vast political difference between cuts in one versus the other.”

Health, Welfare Cuts

Brown’s budget also finances a shift in some health, welfare and prison programs to counties, which he has called realignment. His ballot measure also would include a constitutional protection of the money needed to keep paying counties for those services.

“The state of California (STOCA1) is a very generous, compassionate political jurisdiction,” Brown said. “When we have to cut spending, that spending is going to come from programs that are doing a lot of good. It’s not nice. We don’t like it. But the economy and tax statutes of California make just so much money available.”

The $4.8 billion additional cut in education would be automatic if voters turn down Brown’s tax increase. Similar so- called trigger cuts aren’t new. Last month, Brown had to make $1 billion in additional cuts, including eliminating a $258 million busing subsidy, and trimming $230 million from higher education and $200 million in programs that help the elderly and disabled, after revenue fell below his estimates.

‘Boomerang’ Effect

“The boomerang could be that it makes voters more angry if they feel they’re being threatened,” state Senator Doug LaMalfa, a Richvale Republican, said in a telephone interview yesterday. “Voters don’t cotton to being threatened.”

Brown and fellow Democrats in the Legislature inserted those automatic reductions in the $86 billion budget they passed in June. They said at the time that the nascent economic rebound was likely to boost tax collections by $4 billion more than had been forecast a month earlier.

Then the recovery was shaken by Europe’s widening debt crisis and an impasse over raising the U.S. debt ceiling. In December, Brown’s Finance Department said revenue for the fiscal year ending June 30 would probably fall $2.2 billion below projected levels.

The cuts were intended in part to make sure that the state had enough cash on hand to repay investors who bought $5.4 billion of short-term cash-flow notes, which come due in June.

“The governor’s budget continues the progress made last year toward restoring stability, solvency and sanity to the state’s finances,” California Treasurer Bill Lockyer said yesterday in a statement. “It’s an honest, balanced and prudent plan.”

To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net; James Nash in Sacramento at jnash24@bloomberg.net

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

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